Competititvity Research Network

WO R K I N G PA P E R S E R I E S
N O 174 8 / D E C E M B E R 2014
ENTERPRISE PRODUCTIVITY
A THREE-SPEED EUROPE
Andrea DallOlio, Mariana Iootty,
Naoto Kanehira and Federica Saliola
THE COMPETITIVENESS
RESEARCH NETWORK
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CompNet
TThe Competitiveness Research Network
This paper presents research conducted within the Competitiveness Research Network (CompNet). The network is composed of
economists from the European System of Central Banks (ESCB) - i.e. the 28 national central banks of the European Union (EU) and the
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The objective of CompNet is to develop a more consistent analytical framework for assessing competitiveness, one which allows for a
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The research is carried out in three workstreams: 1) Aggregate Measures of Competitiveness; 2) Firm Level; 3) Global Value Chains
CompNet is chaired by Filippo di Mauro (ECB). Workstream 1 is headed by Chiara Osbat, Giovanni Lombardo (both ECB) and
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Acknowledgements
The authors are economists at the World Bank. The paper benefitted from the guidance by Indermit Gill, Martin Raiser (World Bank)
and Juan Zalduendo (IMF). The authors would like to thank Jared Fronk (Georgetown University) for valuable research assistantship,
Louise Grogan (University of Guelph) and Miriam Bruhn (World Bank) for relevant comments and technical contributions, the staff
of Eurostat and of the Bureau van Dijk for inputs and clarification on the data. The team is grateful to the World Bank for financial
support. A preliminary version of the analysis in this paper appeared in Golden Growth Restoring the Lustre of the European Model
(Chapter 4). The views expressed in this paper are those of the authors and should not be held to represent those of the World Bank
Group or its Executive Directors.
Andrea DallOlio (corresponding author)
World Bank; e-mail: adallolio@worldbank.org
Mariana Iootty
World Bank
Naoto Kanehira
World Bank
Federica Saliola
World Bank
European Central Bank, 2014

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ISSN
ISBN
DOI
EU Catalogue No
1725-2806 (online)
978-92-899-1156-6
10.2866/36467
QB-AR-14-122-EN-N (online)
Abstract
Between 2003 and 2008 productivity patterns diverged between the fast growing, newest
members of the European Union and the slower paced, elder ones as would be expected.
However, there are also striking divergences within the latter group, with productivity in
Southern Europe going into reverse. This paper analyzes which factors - whether countrylevel or firm-specific ones - contributed more to the emergence of a three-speed Europe. The
analysis combines firm-level data with country-level inputs. Among the newest members of
the European Union, country characteristics including the stock of inward foreign direct
investment, the availability of credit, and the quality of the business environment and the
skills of the workforce prove to be the most important drivers. Firm specific characteristics
are shown to matter as well, notably that small firms and firms which are part of international
groups realize more productivity gains than larger domestic competitors. Among the more
advanced member countries, firm-level characteristics are most important, with larger firms
and firms with international affiliation demonstrating faster productivity gains. Country
specific factors, such as the quality of the business environment, the size of outward FDI and
the skills of the workforce, do matter as well. These explanations of diverging productivity
patterns suggest that European Union nations can realize significant benefits from low cost
policy interventions such as improving business regulations and encouraging firms
internationalization.
Key words: productivity, regulation, firm performance, foreign direct investment, global
value chains, firm characteristics, Doing Business, European Union.
JEL: D22, H11, O47, O52
ECB Working Paper 1748, December 2014
Non-technical summary
The first decade of the 21st century witnessed significant structural changes throughout
Europe, including the introduction of the Euro, the expansion of the European Union, and the
acceleration of globalization. Despite these common shocks, the member countries of the EU
evidence widely disparate responses in productivity growth. Some countries took advantage
of these changes to upgrade technology, adopt new management processes, and learn from
their more productive neighbors through the flow of capital, labor, and goods, while others
lagged behind. In particular, the twelve newest members of the European Union (EU12)
experienced vigorous productivity growth, three to four times higher than the growth of the
fifteen prior members of the European Union (EU15). However, as New Europe raced to
catch up with Old, the southernmost states of Western Europe fell drastically behind, actually
experiencing productivity contractions.
This paper sheds light on the factors that led to these disparate outcomes across members of
the European Union in the 2003-08 period. Using a unique dataset combining firm-level data
on productivity and firm characteristics and country-level data on basic macro, infrastructure
and business environment indicators, this paper tries to disentangle the effects of country and
firm-level factors on productivity performance to answer the policy question of what
countries may do to encourage greater productivity growth. In this regard this paper is
relevant and complementary to the work CompNet is mandated to as it brings new evidence
on the drivers of productivity in EU countries and firms, and discuss how such indicators
relate to policy outcomes.
Results show that among the newest members of the European Union, country characteristics
including the stock of inward FDI, the availability of credit, and the quality of the business
environment and the skills of the workforce prove to be the most important drivers. Firm
specific characteristics are shown to matter as well, notably that small firms and firms which
are part of international groups realize more productivity gains than larger domestic
competitors. These results suggest that accession to the EU has been beneficial for new
members because the ease with which foreign firms may now penetrate these new markets
has facilitated the transfer of technology and the diffusion of best practices. The clear policy
implication is that developing countries may realize significant productivity gains by taking
the relatively easy steps of improving their regulatory regimes and creating environments
attractive to inward FDI before addressing the more costly requirements of improving
infrastructure and better educating their workforces.
Among the EU15 members, a mixed picture has emerged. For the more advanced member
countries, firm-level characteristics are most important, with larger firms and firms with
international affiliation demonstrating faster productivity gains. Country specific factors,
such as the quality of the business environment, the size of outward FDI and the skills of the
workforce, do matter as well. Taken together, these results suggest that multinational
corporations might have a role in driving productivity growth in developed countries.
Meanwhile, our analysis suggested that productivity losses experienced by Greece, Italy,
Portugal, and Spain may be attributed to disadvantageous and restrictive regulatory regimes,
leading to a relative preponderance of small- and medium-size firms. These factors
discourage international participation and sharply limit the EU15 Souths ability to benefit
from knowledge transfers from abroad, economies of scale, and production-reallocation
efficiencies.
Overall, these explanations of diverging productivity patterns suggest that European Union
nations can realize significant benefits from low cost policy interventions such as improving
business regulations and encouraging firms internationalization.
Introduction and Main Findings
Between 2002 and 2008, the European Union (EU) experienced significant structural
changes, including the introduction of the Euro, the 2004 expansion, and the proliferation of
international business linkages worldwide. In parallel with this process, substantial changes
took place including technological upgrades, adoption of new management processes, and
regulatory reform.2 Against this backdrop, firms in the twelve newest members of the
European Union (EU12, the New Europe)3 experienced vigorous productivity growth, three
to four times greater than the growth of the fifteen elder members of the European Union
(EU15, the Old Europe)4. However, as New Europe raced to catch up with Old, the
southernmost states of Western Europe fell drastically behind, and experienced productivity
contractions. What factors led to these disparate outcomes? This paper disentangles the
effects of country- and firm-level variables on productivity to answer the policy question of
what countries may do to encourage greater productivity growth.
Recent research efforts have revealed extensive heterogeneity in productivity growth across
countries and sectors, even within narrowly defined industries.5 We use the 2010 Amadeus
database,6 which provides firm-level data on employment, sector, age, and international
affiliations.7 We augment this with country-level business environment indicators from the
Doing Business (DB) database, foreign direct investment (FDI) data from Eurostat,
infrastructure quality indicators from the Global Competitiveness Report, credit availability
and workforce education data from the World Development Indicators (WDI). Using
ordinary least squares (OLS) regression, we estimate the contribution of each factor to
productivity growth between 2003 and 2008, both individually and as sets of either firm- or
country-level variables.
For the EU12, country-level characteristics contribute the most toward explaining
productivity growth. Of the variables included, the most influential are DB indices of
government business regulation, the stock of inward foreign direct investment, the
availability of credit and the education of the workforce. Firms with international owners or
affiliates grew significantly faster than purely domestic firms.8 These two effects suggest that
government policies promoting FDI might have an impact in productivity growth. The results
are similar for manufacturing and services.
Aghion, Acemoglu, and Zilibotti (2006).

The EU12 consists of Bulgaria, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta,
Poland, Romania, the Slovak Republic, and Slovenia. However, Cyprus and Malta are excluded from the
analysis due to lack of data.
4
The EU15 consists of Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom. However, Luxembourg and
Ireland are excluded from the analysis due to lack of data.
5
For surveys of the literature, see Wagner (2007); Foster, Haltiwanger, and Krizan (2001); Bartelsman,
Haltiwanger, and Scarpetta (2004); Barba Navaretti and Venables (2004).
6
Amadeus is a comprehensive firm-level database containing financial information for over 11 million public
and private companies throughout Europe produced from the Bureau van Dijk
7
Using information related to business groups, we identify purely firms and groups operating purely in domestic
markets, domestic subsidiaries of international groups and global headquarters.
8
This result is common in the literature. See Dunne, Roberts, and Samuelson (1989); Ilmakunnas and Maliranta
(2004); Smarzynska and Javorcik (2004).
3
Among the EU15, firm-level variables are the most important determinants of productivity
specifically, firm size and ownership. Smaller firms grow more quickly than large ones.
Meanwhile, foreign-affiliated firms show much greater productivity gains compared with
purely domestic firms: global headquarters grow most quickly, followed by domestic
subsidiaries. Firm age does not appear significant to explain productivity growth in
manufacturing, but older firms in services appear to have a productivity advantage over
younger ones.
Of the country-level variables, the quality of government regulation, outward FDI and
workforce education explain much of the variation across member nations, indicating that
policy again plays a significant role in productivity growth.
The results above can be used to explain the productivity pattern for the EU15 southern
economies Greece, Italy, Portugal, and Spain (EU15 South) which stand out as
exceptions to the general European trend toward productivity growth. According to the
results, the falling productivity between 2003 and 2008 is most likely explained by a
distribution of firms skewed toward small and domestic producers, a limited degree of firms
internationalization and regulatory regimes disadvantageous to the expansion of private
industry.9 The three factors above appear to be correlated. Burdensome regulations constrain
the growth of private businesses, as confirmed by the correlation between the number of
microfirms and the quality of government regulation. At the same time, small firms are less
likely to expand abroad, as evidenced by EU15 Souths lower rates of outward FDI, and are
less attractive FDI target. This situation in turn reduces these states ability to benefit from
technology and knowledge transfers, accordingly reducing their potential for productivity
gains.
A key policy implication of this paper is particularly relevant at a time of fiscal consolidation:
improving government regulation (and encouraging FDI) might help lagging European
countries catch up to their neighbors. These policies have limited costs and faster impact than
corresponding investments in infrastructure and education.
The remainder of the paper is organized as follows. Section 2 provides motivation and a
survey of the current literature. Section 3 describes the data in detail, while Section 4 explains
the methodology of the analysis. Section 5 contains a discussion of the results, broken up into
three subsections. The first section describes the results for the EU12, the second for the
EU15, and the third discusses the EU15 South. Section 6 concludes and offers suggestions for
future research.
1.
Motivation and Related Literature
The persistence of productivity differencesmeasured as either labor productivity or total

factor productivityacross firms, even within narrowly defined industries, has inspired
extensive research into its causes.10
At the national level, economists have posited explanations of productivity differences based
on the countrys business environment determined by government regulation, taxation,
industrial support, and openness to international trade and FDI. Based on a set of twelve
Organisation for Economic Co-operation and Development (OECD) countries and using
industry-level data, Nicoletti and Scarpetta (2003) find that restrictive regulation in
manufacturing tends to reduce multifactor productivity (MFP) growth. The authors suggest
9
See Ateriodo, Hallward-Driemeier, and Carmen (2007).

Foster, Haltiwanger, and Krizan (2001) provide a seminal and rich review of the literature on productivity
dynamics. This paper focuses on firm- and country-level variables. For analysis using product-level variables,
see Bernard, Redding, and Schott (2006).
10
that such restrictive regulations reduce competitive pressures to invest in productivityenhancing technologies. Using related approaches, Conway et al. (2006) and Arnold,
Nicoletti, and Scarpetta (2008) reach similar conclusions for European countries, especially
for technology-driven productivity improvements.11 This paper expands on these results by
including eleven more European countries, controlling for more country- and firm-level
factors, and employing a resampling technique to ensure that the sample accurately reflects
the population.
Wagle (2010) investigates the effects of regulation on FDI and concludes that FDI-increasing
regulations prompt beneficiary firms to grow more quickly, through either selection effects or
knowledge transfers.12 This paper tests for these effects using business environment
variables.
Burda and Hunt (2001) take a different approach, investigating the effects on productivity
when countries integrate their economies. They find evidence that less productive members
of economic unions benefit from productivity transfers from their partners.13 Winston (1993),
Harrison (1994), and Meyer and Vickers (1997) suggest that integration improves
productivity growth by increasing competition. This competition leads to the expectation of
convergence. This paper considers both integration and international affiliations.
The effects of firm size, age, and ownership structure on labor-productivity growth are also
analyzed in the paper.14 Dunne, Roberts, and Samuelson (1989), using a dataset including
200,000 U.S. manufacturing firms from 19671977, find that size is negatively correlated
with growth, and that the expected growth rate of a firm declines with size for firms owned
by single-plant firms, but increases with size for firms owned by multi-plant firms,
suggesting synergies from FDI. The importance of FDI for growth is a persistent result
throughout the literature,15 and one further supported by the current findings.
The research most similar to that presented in this paper is the work of Anos Casero and
Udomsaph (2009). The authors show a direct correlation between productivity growth and
the quality of institutions and government policies. They also use the Amadeus dataset and
employ principal component analysis (PCA) to evaluate the quality of the business
environment. However, their analysis covers only eight European countries, and their sample
11
These studies use the framework proposed by Aghion and Griffith (2005) in which productivity growth within
a country/sector is calculated in relation to the pace of the country/sector leader. This growth, in turn, depends
on the business environment and policies in the follower country, especially those policies that promote firm
rivalry and market entry. Arnold, Nicoletti and Scarpeta (2008) use firm-level data and focus on MFP growth.
Nicoletti and Scarpetta (2003) also measure MFP but use industry-level information, while Conway et al. (2006)
use industry-level data but measure labor productivity growth. All of these studies rely on OECD country
samples.
12
For more on FDI and growth, see Barba Navaretti and Venables (2004), Bernard and Jensen (1995), and
Vogel and Wagner (2009).
13
Specifically, Burda and Hunt (2001) suggest five mechanisms for productivity transfers: (1) capital
accumulation, (2) migration, (3) FDI, (4) Hecksher-Ohlin factor price equalization, and (5)
knowledge/technology spillovers. See also Ackerlof et al. (1991).
14
There has been considerable disagreement among studies as to the causes of productivity growth. On one
hand, using a panel of fourteen OECD countries for 19701987, Bernard and Jones (1993) find growth in total
factor productivity (TFP) due to within-firm technological improvement and capital accumulation. Olley and
Pakes (1996) and Restuccia and Rogerson (2007), on the other hand, find that productivity gains are primarily
the result of reallocation of resources to high-productivity firms from low. Still other studies have found net
entry to be the most influential motor.
15
Wagner (2011) suggests several pathways by which firms may benefit from inward FDI, including knowledge
transfers and spillover effects. See Smarzynska Javorcik (2004) for growth effect from outward FDI on
domestic firms in Lithuania; Barba Navaretti and Venables (2004) for a survey of empirical studies on
productivity differences between foreign owned firms and domestic firms.
is driven by the data availability in Amadeus.16 The resampling techniques used in this paper
and the use of a larger universe of countries and firms improve upon that analysis.
In summary, in this paper we hope to offer several novel additions to the literature. First,
there is the use of the Amadeus database in conjunction with a resampling technique to
represent the underlying population and generate a representative, cross-country sample.
Second, the paper combines firm/ industry-, and country-level variables to form conclusions
about the relative importance of these different levels of analysis. Finally, the inclusion of the
DB business environment variables through a principal component analysis provides clear
policy implications on how to improve productivity growth via regulatory reforms.
2.
Data
Figure 1 and Figure 2 describe the average productivity levels and their growth rates for the
twenty seven EU member countries over the period 20022008.17 While in 2002 the average
productivity in the EU12 was much lower than in the EU15, the laggards countries realized
much greater increases in labor productivity through 2008. However, the Southern countries
in the EU15 South performed exceptionally weakly: Greece, Italy and Spain suffered
negative productivity growth over the relevant period, while Portugal only realized a
marginal productivity improvement.
Figure 1 Average Labor Productivity in the EU27, 2002
Source: World Bank staff calculations based on Eurostat.

Note: Labor productivity is defined as value-added per employee. For Belgium and Greece, productivity levels are from 2003. Data are in
thousands of 2005 U.S. dollars. The following sectors are included: manufacturing, wholesale/retail trade, hotels/restaurants,
transport/communications, and real estate/business services.
This paper would like to gain an understanding of the factors behind such disparate
outcomes. The analysis is based on firm-level data from the Amadeus database. For each
firm, the following variables are extracted: total number of employees,18 as an indicator of
firm size; sector (NACE 1.1 digit) to determine the firms primary economic activity; year of
registration to establish the firms age; and the global ultimate owner of the firm, to identify
16
Over half of the firms included into the sample are from Romania.
The aggregate figures on labor productivity growth presented in this paper are based on the Eurostat
Structural Business Statistics database (SBS) for contestable sectors, with the exclusion of construction. As
such, these data do not exactly mirror the aggregations presented in Table 1, which rely on WDI/International
Labour Organization (ILO) data and include mining, energy utilities, financial intermediation, government, and
other services, such as education and health. In addition, the data from SBS and ILO reflect different time
periods: 20022008 and 19952009, respectively.
18
The reported number of employees includes all part-time and full-time employees, both temporary and
permanent.
17
the firms ownership structure. Data on value-added19 also from Amadeus, are used as a
company performance indicators.20 Productivity is then defined as value-added per employee
(labor productivity). The analysis was restricted to labor productivity for two reasons. First,
the labor measure is directly observable at the firm level. Second, it avoids the bias arising
from the simultaneity between productivity and inputs encountered with total factor
productivity (TFP) estimations.21
Figure 2 Average Labor Productivity Growth in the EU27, Annual Rates, 20022008
Source: World Bank staff calculations based on Eurostat.

Note: The time period considered varies by country: Belgium (200308), Greece (200307), and Great Britain, France, Czech Republic,
Latvia, and Romania (200207). The following sectors are included: manufacturing, wholesale/retail trade, hotels/restaurants,
transport/communications, and real estate/business services.
Although Amadeus constitutes a rich and detailed database, its coverage is skewed in favor of
large firms, thereby underestimating the distribution with regards to small businesses. A resampling technique was used based on which random draws are taken for each size-sectorcountry stratum according to the true population of firms based on Eurostat (Appendix III
provides a detailed description of the re-sampling methodology). Even after re-sampling, the
country coverage differs widely: according to the ratio between the targeted number of
companies (in the population) and the number of sampled firms for this reason, two different
samples are obtained: sample 1 contains firms with at least 10 employees, covers fewer
countries, but has more firms; Sample 2 contains firms with at least 50 employees, covers
more countries, but fewer companies.22 Given that firms are only removed from Amadeus
after at least five years of non-reporting, 23 it is therefore impossible to distinguish between
firms that exit the dataset due to insolvency and those which exit for some other reason, such
as merger. To address this limitation, the analysis focuses on a balanced sample of surviving
19
Value-added is defined in Amadeus as profit plus depreciation, taxation, interest payments, and employment
costs.
20
Value-added figures were denominated in nominal local currencies. These values were deflated using gross
domestic product deflators constructed using United Nations Economic Commission for Europe (UNECE) data
according to the following sector aggregations: i) manufacturing; ii) wholesale & retail trade, repairs, hotels &
restaurants, transport & communications; and iii) real estate, renting & business activities (see UNECE
Statistical Database. http://w3.unece.org/pxweb/). The obtained figures were converted to 2005 U.S. dollars
using annual average exchange rates provided by the WDI dataset (World Bank. World Development Indicators.
http://databank.worldbank.org).
21
See Dachs, Ebersberger, and Lf (2008).
22
See Appendix III for more details on how these samples were defined.
23
Firms that stop reporting their financial statements are represented as "not available/missing" for four years
following the last available filing.
firms, i.e. firms present for the entire date range.24 Another limitation of the Amadeus dataset
is that it contains financial statement data and as such it does not allow measuring the
availability of bank credit at individual firms level. As such the analysis will not be able to
measure the direct impact of access to finance on firm productivity. To compensate this
shortfall, the analysis will rely on macro indicators to measure the availability of bank
lending at country level.
Table 1 shows the sample compositions and compares the aggregate productivity growth
from the micro-level data with the aggregate ones from Eurostat.25 The comparison suggests
that the samples mirror productivity trends at the macro level, lending credence to the use of
micro data to explain macroeconomic growth.26
Table 1 Aggregate Annual Productivity Growth, 20022007: Amadeus27 and Eurostat
data
Sample 1 (10+ employees)
Obs
EU12
Bulgaria
Czech Rep.
Estonia
Poland
Romania
Slovak Rep.
Slovenia
EU15
Belgium
Finland
France
Germany
Great Britain
Italy
Norway
Portugal
Spain
Sweden
Total
2,410
561
3,811
4,249
526
2,485
1,036
15,029
17,143
1,523
16,850
2,436
68,059
Manufacturing
Amadeus
Eurostat
12.81%
6.00%
8.22%
9.10%
10.76%
3.20%
1.14%
5.90%
7.47%
9.60%
5.70%
10.49%
1.60%
11.10%
4.40%
2.40%
-6.60%
1.50%
4.30%
2.89%
7.03%
3.89%
3.38%
3.61%
1.92%
-3.90%
2.85%
1.48%
6.03%
Sample 2 (50+ employees)
Services
(w/o construction)
Amadeus
Eurostat
9.75%
6.20%
5.65%
8.70%
6.41%
7.20%
4.28%
2.80%
4.84%
1.66%
2.80%
6.34%
0.80%
4.80%
2.60%
1.90%
5.60%
0.90%
2.10%
0.54%
2.92%
1.10%
0.99%
3.21%
0.73%
7.10%
-0.80%
0.14%
1.72%
Obs
256
532
85
1,267
853
196
104
366
147
2,322
2,733
2,408
1,788
189
493
1,884
383
16,006
Manufacturing
Amadeus
Eurostat
9.20%
13.66%
6.80%
8.42%
6.80%
10.47%
1.20%
0.37%
5.30%
8.44%
8.40%
9.87%
6.40%
10.04%
2.70%
4.30%
3.70%
2.50%
3.00%
1.10%
2.20%
2.70%
1.10%
4.40%
3.46%
7.02%
3.77%
3.67%
3.76%
1.99%
4.70%
3.53%
1.15%
6.48%
Services
(w/o construction)
Amadeus
Eurostat
8.10%
8.18%
7.30%
5.71%
6.50%
3.70%
2.10%
3.75%
5.50%
5.03%
15.30%
1.28%
5.60%
1.26%
1.50%
9.80%
4.80%
2.20%
1.20%
-0.70%
-4.40%
-2.20%
-1.30%
2.50%
0.40%
2.78%
0.41%
1.58%
3.68%
-0.12%
-3.80%
-2.54%
-0.08%
1.74%
Source: World Bank staff calculations based on Eurostat and Amadeus
We include several variables to account for country-level variation. From the World Banks
World Development Indicators (WDI) database, we define access to credit as measured by
the ratio of domestic credit to private sector to GDP and skills as measured by the percent of
the total labor force with tertiary education. Quality of overall infrastructure is measured by
an index taken from the Global Competitiveness Report, a survey of business leaders
published by the World Economic Forum. 28 Inward and outward stock of foreign direct
24
As a result, surviving firms are likely to have different productivity level than the underlying population.
The comparison is performed for 20032007, the years for which Eurostat and Amadeus overlap.
26
Appendix I shows the kernel density estimations of annualized growth of labor productivity (20032008) for
each sample for two regional cuts: EU15 and EU12. Both estimations use the Epanechnikov kernel function
with a bandwidth of 0.5. Appendix II presents the corresponding firm-level summary statistics. For both
samples, the distribution for EU12 firms is higher than for EU15, suggesting that EU12 firms realized greater
productivity growth. A Kolmogorov-Smirnov test for equality of distribution functions rejects the null
hypothesis at the 1 percent.
27
Aggregate productivity in Amadeus is computed as total value-added divided by total number of employees.
28
World Economic Forum. Global Competitiveness Report. http://www.weforum.org/issues/globalcompetitiveness. As with all indicators available at the Global Competitiveness Report database, the index of
Quality of overall infrastructure Index 2.01, under the 2nd pillar Infrastructure varies from 1 to 7; the
higher the value the better is the quality of infrastructure.
25
investment (FDI) are measured as the ratios of the stock of FDI to GDP for manufacturing
and for service sectors, from the Eurostat database.29
To assess the regulatory environment within each country, we employ the World Banks
Doing Business30 (DB) database. Using principal component analysis, we construct a
comprehensive index of all regulatory policies, all_DoingBusiness. A second variable,
DB_business_startup, indexes barriers to entry and exit, including the costs of starting a
business, registering property, and closing a business. DB_business_operations indexes the
difficulty of operating a firm, including securing construction permits, paying taxes, trading
across borders, and employing workers. Finally, DB_institutional_environment is an index of
the quality of the legal and institutional framework for enterprises, including the level of
protection for minority shareholders, the quality of the credit information systems, and the
cost and speed of contract enforcement. All indices are coded such that higher values indicate
better regulation.31 When analyzing the effects of business regulation on firm performance
based on the Amadeus panel of incumbent firms, the last two principal components analysis
indiceson business operations and institutional environmentare used. For these
companies that managed to survive over the period, entry and exit regulation tend to matter
less.
Summary statistics for all variables are provided in Appendix XI.
3.
Methodology
We use the following specification to analyze productivity growth in Europe.

ln(Prod
0308 =+2 ln(Prod )03
2 Agei,03 +3 Sizei,03 +4 OwnTypei,03 + (InwFDI
(OutFDI
7 (Credit
(Infra
+8 (Skills
Sector +
(Bus.Reg
Country +i,
Eq.(1)
The variable ln Prod 0308 is the annualized growth rate of labor productivity (defined as
value-added per employee) for firm i from 2003 to 2008.32
Size, is expressed in terms of number of employees on the companys payroll. Firms are
grouped into five size categories: microenterprises (1049 employees), small firms (50249),
medium firms (250499), large firms (500999), and very large ones (above 1,000).
Age in years is divided into categories of 15 years old, 610, 1120, 2130, and older than
31. Learning and selection effects imply that younger firms will grow more quickly33.
29
FDI stocks are the value of FDI assets (for outward FDI stocks) and of FDI liabilities (for inward FDI stocks)
at the end of the reference period. Data are expressed as percentage of GDP to remove the effect of differences
in the size of the economies of the reporting countries.
30
World Bank. Doing Business. http://doingbusiness.org/.
31
The PCA is built on the basis of the Doing Business indicators and as such shares the indicators
methodological limitations. To verify the robustness of the indices, we compare the PCA results with an
alternative measure of the quality of business regulation, the Product Market Regulation indicator from OECD.
See Appendix IV for a detailed discussion of the PCA methodology and the results of the comparison.
32
ln(Prod)i,03-08 is calculated as
2008
2003 .
33
Various studies have shown that conditional on size and survival rate, young firms tend to grow faster than
older firms due to diminishing returns to learning. See Klepper and Thompson, 2007; Dunne, Roberts and
Samuelson, 1989.
Ownership type, measuring the impact of FDI at firm level, is operationalized as a categorical
variable denoting whether the firm is a global headquarters with foreign subsidiaries34, a
foreign-affiliated firm35, or a purely domestic firm.36 The coefficients on ownership
categories capture the effects of foreign affiliation. Specifically, the coefficient on foreign
captures the productivity benefits that a foreign-owned firm realizes from intra-organizational
transfers and integration in global markets. The coefficient on global headquarters captures
benefits to firms from investing abroad to expand their consumer base and increase
efficiency. We expect that global headquarters will grow most quickly, followed by foreignaffiliates. Purely domestic firms will have the slowest growth.
(InwFDI
measures the change in the inward stock of FDI in country j. This indicator
measures the indirect impact of the aggregate FDI flows into the country and should be
analyzed in combination with the direct impact of foreign investments at firm level, measured
by the ownership type.
(OutFDI
measures the same for outward stock of FDI.
(Credit
measures changes in the ratio of the credit to the private sector as a
percentage of GDP. This indicator measures the (indirect) impact of the availability of credit
to the private sector on an individual firm.37
(Skills
measures changes in the percentage of the workforce with a tertiary education,
i.e. the impact on an individual firms arising from the potential availability of an educated
workforce to tap into.
(Bus.Reg
measures changes in business regulation. We predict that better regulations
will be positively correlated with more rapid productivity growth.
(Infra
measures variation in the index of quality of infrastructure.
The log of productivity in 2003 is included to control for initial firm characteristics: firms
that begin with higher productivity levels may realize slower growth rates.38 We include
country and sector fixed-effects, which account for unobserved country- and industry-specific
characteristics that might affect productivity growth.
Sector is a vector of sector dummy variables defined at the NACE 1.1 level, while Country
is a vector of country dummy variables.
Estimations are produced using ordinary least squares (OLS), and errors are clustered by
country to allow for possible correlations in growth rates across firms in the same country.
34
Due to an idiosyncrasy of the Bureau van Dijk, co-national affiliates of headquarters firms with foreign
subsidiaries are also listed as global headquarters.
35
Foreign-owned firms are classified as those which have at least 51 percent foreign ownership. For 34 percent
of firms classified as foreign affiliated by Bureau van Dijk, we cannot identify the exact ownership stake.
However, as they are mostly small firms, we assume they are not publicly traded firms in which the parent's
ownership could be diluted and are therefore managerially fully in control of the foreign parent.
36
Given that the sample excludes all firms that were involved in merger and acquisitions operations, the
ownership structure of a firm observed in 2009 is assumed to be the same as in 2003. We follow Brown and
Earle (2002) in using the latest ownership status to create ownership dummies for 2003. However, it is worth
noting that we are not able to control for cases in which the firm ownership structure has changed due to a joint
venture.
37
However, it does not measure credit constraints at firm level: even though credit might be highly available in
the economy, credit allocation could not be optimal and most productive firms might face credit constrains.
38
The inclusion of this variable may reflect convergence as proposed by Barro and Sala-i-Martin (1992). We
expect the coefficient of baseline productivity level to be negative.
10
Regressions are run separately for EU15, EU12, and other countries as a way to better search
for the sources explaining the differences between the two regions. 39 Besides, in order to also
explore the sector heterogeneitymainly related to different technologies usedwe also
separate the regressions by manufacturing and services, which highlight the drivers of
productivity growth in different sectors of the real economy. The model also includes sector
dummies to distinguish between firms belonging to different NACE 1.1 categories.40 Results
are then presented separately for EU12 and EU15 as well as for manufacturing and services
industries.
Extreme outliers41 were excluded to obtain the final samples. Regressions are performed for
Sample 1 while Sample 2 is used as a robustness check (results are found in Appendices VI
IX).
4.
Results
In this section, we present separately the results of the analysis for the EU12 and EU15
countries. A separate section is dedicated to the interpretation of the results for EU15 South.
4.1
EU12: a catching up story
The first question to answer is which category of determinantscountry or firmmatters
most in explaining productivity growth in the EU12. For these less developed economies,
country factors matter most. The exclusion of firm characteristics from the regression for
manufacturing sectors reduces the explanatory power of the model by 8 percent. However,
when country dummies are excluded, the model loses roughly four times as much predictive
power (33 percent). The detailed results are presented in Table 2.42
An additional counterfactual exercise could be used to further determine the interaction
between firm- and country-characteristics. By comparing how the estimated country
dummies change when adding each one of the firm variables in the model, one could verify
the impact of each of the factors (baseline productivity, sector, ownership, size, and age) in
explaining cross country differences. For example, if the model includes only country
dummies, the average productivity gap between a Czech and a Slovenian manufacturing firm
is 6.6 percent. Upon adding baseline productivity, this gap falls to 4.7 percent. Adding sector
dummies does not change the result (4.6 percent). When including the ownership and size
controls, the gap falls to 3.8 percent, indicating that the Czech Republic has an adverse mix
of firm characteristics. The residual difference is country specific. 43
39
The separations observed in the kernel densities presented in Appendix I suggest that the performance of
firms is in fact different in these two regions.
40
Construction is excluded from the analysis given its cyclical nature (Burns and Grebler, 1982).
41
A three-step procedure was implemented to control for extreme outliers. First, firms involved in merger and
acquisitions operations were excluded from analysis: growth via merger is outside the scope of this paper.
Second, companies whose annual productivity growth was more than three standard deviations away from the
mean in each country were excluded. Third, in order to control for extreme outliers in terms of employment, we
adopted criteria conditioned on firm size. For firms with fewer than 50 employees, we dropped observations for
which the annual change in employment in any year was greater than 300 percent. For firms with more than 50
employees, we dropped those observations with an annual change greater than 50 percent. We also dropped
observations for which the annual growth rate in any year exceeded 1000 percent.
42
For service sectors, a similar pattern emerges since the explanatory power of the model falls more when
dropping country-fixed effects (23 percent) than when excluding firm characteristics variables (8 percent).
43
For a discussion of results from Sample 2, see Appendix V.1.
11
Table 2 - Decomposition of Explanatory Power: EU12 (Sample 1)

All controls
ln_lp2_usd05_03
Size(50-249)
Size(250-499) 1
Size(500-999) 1
Size(1000+)
Age(6-10)
Age(11-20)
Age(21-30)
Age(>=31)
Global Head.
Czech Rep.4
Estonia
Poland
Romania
_cons
NACE dummies
R-squared
N. obs
1
-0.1237***
(0.005)
-0.0156**
(0.007)
-0.0530***
(0.012)
-0.0229
(0.019)
-0.0582**
(0.029)
-0.001
(0.009)
-0.0027
(0.009)
0.0102
(0.021)
0.0079
(0.018)
0.0670**
(0.033)
0.0384***
(0.010)
-0.0371**
(0.017)
-0.0209***
(0.008)
-0.1437***
(0.010)
1.2183***
(0.049)
Yes
0.2185
3925
Manufacturing
no
no firm/sector
country
-0.0899***
-0.1167***
(0.005)
(0.005)
-0.0119*
(0.007)
-0.0438***
(0.013)
-0.0286
(0.019)
-0.0731***
(0.027)
0.0074
(0.010)
0.0153
(0.009)
0.0452**
(0.021)
0.0249
(0.017)
0.1019***
(0.036)
0.0466***
(0.009)
-0.0280*
(0.015)
-0.0237***
(0.007)
-0.1488***
(0.009)
0.8398***
1.1768***
(0.044)
(0.049)
Yes
No
0.1462
0.2002
3925
3925
Services (except construction)

All
no country
-0.1122***
(0.003)
-0.0130***
(0.004)
-0.0269***
(0.009)
-0.014
(0.015)
-0.0217
(0.032)
0.0013
(0.005)
-0.0017
(0.005)
-0.0132
(0.018)
-0.0036
(0.010)
0.0309*
(0.018)
0.0344***
(0.007)
-0.0384***
(0.010)
-0.0152***
(0.005)
-0.1114***
(0.007)
1.0991***
(0.029)
Yes
0.2007
5,927
-0.0869***
(0.003)
-0.0100**
(0.005)
-0.0204**
(0.010)
-0.0152
(0.015)
-0.0233
(0.031)
0.0054
(0.006)
0.0091
(0.006)
0.019
(0.017)
0.0032
(0.010)
0.0547***
(0.018)
0.8168***
(0.025)
Yes
0.1544
5,927
no firm/sector
-0.1053***
(0.003)
0.0475***
(0.007)
-0.0258***
(0.009)
-0.0110**
(0.005)
-0.1054***
(0.007)
1.0681***
(0.028)
No
0.1839
5,927
(10-49) is the omitted size category. 2 (1-5) is the omitted age category. 3 Purely domestic is the omitted ownership
category.
4
Slovenia is the omitted country. Significance: *** 1%, ** 5%, * 10%.
Table 3 presents the estimation results for Eq. (1) for the EU12. Columns (1) and (7) show
the results of the model (for manufacturing and services separately) when a comprehensive
PCA indicator of all Doing Business variables is included. The remaining columns present
the results using the PCA index measuring the difficulties associated with operating and
maintaining a business (DB_Business_operations) and the (associated) original variables of
paying taxes, trading across borders, employing workers, and obtaining construction permits.
Which country-specific factor correlates best with growth? Productivity gains are correlated
with increases in the availability of credit to the private sector, larger stock of inward FDI,
improvements in the workforce education and in the quality of business environment. The
answer is similar for manufacturing and services, with some minor differences: as expected,
the magnitude of the impact of FDI inflows and credit availability is larger in capital
intensive manufacturing. It is worth analyzing the impact of business environment factors in
manufacturing and services respectively. While the overall quality of the business
environment is impacting productivity growth in both sectors, the magnitude of the impact is
most relevant for services, which are also most sensitive to all indicators. A one standard
deviation increase in the overall business regulation index is conditionally correlated with a
6.35 percent increase in productivity growth for the average manufacturing firm and 7.93
percent for the average service firm. A one standard deviation improvement in the tax
regulations index is correlated with 4.77 percent and 7.10 percent increases in labor
productivity for manufacturing and service firms, respectively.
12
Table 3. Firm-level Productivity Growth and Country-level time varying business indicators in the EU12
(1)
-0.1237***
(0.005)
-0.0156**
(0.007)
-0.0530***
(0.012)
-0.0229
(0.019)
-0.0582**
(0.029)
-0.001
(0.009)
-0.0027
(0.009)
0.0102
(0.021)
0.0079
(0.018)
0.0670**
(0.033)
0.0298***
(0.010)
0.0199***
(0.001)
0.0017***
(0.000)
0.0123***
(0.001)
0.010***
(0.000)
Ln(prod)2003
Size(50-249) 1
Size(250-499) 1
Size(500-999) 1
Size(1000+) 1
Age(6-10)2
Age(11-20)2
Age(21-30)2
Age(>=31)2
Global Head.3
Foreign aff.3
(InwardFDI
(credit
Skills
(All_DoingBusiness
(DB_Business_operations
(2)
-0.1237***
(0.005)
-0.0156**
(0.007)
-0.0530***
(0.012)
-0.0229
(0.019)
-0.0582**
(0.029)
-0.001
(0.009)
-0.0027
(0.009)
0.0102
(0.021)
0.0079
(0.018)
0.0670**
(0.033)
0.0298***
(0.010)
0.0166***
(0.002)
0.0017***
(0.000)
0.0128**
(0.001)
Manufacturing
(3)
(4)
-0.1237***
-0.1237***
(0.005)
(0.005)
-0.0156**
-0.0156**
(0.007)
(0.007)
-0.0530***
-0.0530***
(0.012)
(0.012)
-0.0229
-0.0229
(0.019)
(0.019)
-0.0582**
-0.0582**
(0.029)
(0.029)
-0.001
-0.001
(0.009)
(0.009)
-0.0027
-0.0027
(0.009)
(0.009)
0.0102
0.0102
(0.021)
(0.021)
0.0079
0.0079
(0.018)
(0.018)
0.0670**
0.0670**
(0.033)
(0.033)
0.0298***
0.0298***
(0.010)
(0.010)
0.0167***
0.0165***
(0.001)
(0.001)
0.0018***
0.0018***
(0.000)
(0.000)
0.0139***
0.0164**
(0.001)
(0.001)
(5)
-0.1237***
(0.005)
-0.0156**
(0.007)
-0.0530***
(0.012)
-0.0229
(0.019)
-0.0582**
(0.029)
-0.001
(0.009)
-0.0027
(0.009)
0.0102
(0.021)
0.0079
(0.018)
0.0670**
(0.033)
0.0298***
(0.010)
0.0157***
(0.002)
0.00167**
(0.000)
0.0118**
(0.001)
(8)
-0.1122***
(0.003)
-0.0130***
(0.004)
-0.0269***
(0.009)
-0.014
(0.015)
-0.0217
(0.032)
0.0013
(0.005)
-0.0017
(0.005)
-0.0132
(0.018)
-0.0036
(0.010)
0.0309*
(0.018)
0.0276***
(0.005)
0.0032***
(0.001)
0.0005***
(0.001)
0.0121***
(0.000)

(9)
(10)
(11)
-0.1122***
-0.1122***
-0.1122***
(0.003)
(0.003)
(0.003)
-0.0130***
-0.0130***
-0.0130***
(0.004)
(0.004)
(0.004)
-0.0269***
-0.0269***
-0.0269***
(0.009)
(0.009)
(0.009)
-0.014
-0.014
-0.014
(0.015)
(0.015)
(0.015)
-0.0217
-0.0217
-0.0217
(0.032)
(0.032)
(0.032)
0.0013
0.0013
0.0013
(0.005)
(0.005)
(0.005)
-0.0017
-0.0017
-0.0017
(0.005)
(0.005)
(0.005)
-0.0132
-0.0132
-0.0132
(0.018)
(0.018)
(0.018)
-0.0036
-0.0036
-0.0036
(0.010)
(0.010)
(0.010)
0.0309*
0.0309*
0.0309*
(0.018)
(0.018)
(0.018)
0.0276***
0.0276***
0.0276***
(0.005)
(0.005)
(0.005)
0.0039***
0.0091***
0.0037***
(0.001)
(0.003)
(0.002)
0.0006***
0.0012***
0.0007***
(0.000)
(0.000)
(0.000)
0.0133***
0.0106
0.0136***
(0.001)
(0.002)
(0.001)
-0.031
(0.004)
-0.0341***
(0.004)
0.014***
(0.000)
0.0206***
(0.004)
0.006
(0.004)
(DB_Trading_across borders
(DB_Employing_workers
1.4740***
(0.064)
Yes
Yes
0.2185
3925
1.4601***
(0.071)
Yes
Yes
0.2185
3925
(12)
-0.1122***
(0.003)
-0.0130***
(0.004)
-0.0269***
(0.009)
-0.014
(0.015)
-0.0217
(0.032)
0.0013
(0.005)
-0.0017
(0.005)
-0.0132
(0.018)
-0.0036
(0.010)
0.0309*
(0.018)
0.0276***
(0.005)
0.0012***
(0.000)
0.0004***
(0.000)
0.0125***
(0.000)
0.0095***
(0.001)
(DB_PayingTaxes
NACE dummies
Country dummies
R-squared
N. obs
(7)
-0.1122***
(0.003)
-0.0130***
(0.004)
-0.0269***
(0.009)
-0.014
(0.015)
-0.0217
(0.032)
0.0013
(0.005)
-0.0017
(0.005)
-0.0132
(0.018)
-0.0036
(0.010)
0.0309*
(0.018)
0.0276***
(0.005)
0.0062***
(0.002)
0.0011***
(0.000)
0.0139***
(0.001)
0.012***
(0.002)
0.0051***
(0.000)
(DB_Permits
_cons
(6)
-0.1237***
(0.005)
-0.0156**
(0.007)
-0.0530***
(0.012)
-0.0229
(0.019)
-0.0582**
(0.029)
-0.001
(0.009)
-0.0027
(0.009)
0.0102
(0.021)
0.0079
(0.018)
0.0670**
(0.033)
0.0298***
(0.010)
0.0182***
(0.001)
0.0019***
(0.000)
0.0146*
(0.001)
1.5082***
(0.062)
Yes
Yes
0.2185
3925
1.5064***
(0.061)
Yes
Yes
0.2185
3925
1.4581***
(0.072)
Yes
Yes
0.2185
3925
0.0068***
(0.001)
0.0039***
(0.000)
1.5367***
(0.077)
Yes
Yes
0.2185
3925
0.5355***
(0.093)
Yes
Yes
0.2007
5927
0.7963***
(0.066)
Yes
Yes
0.2007
5927
1.4579***
(0.047)
Yes
Yes
0.2007
5927
1.6703***
(0.065)
Yes
Yes
0.2007
5927
0.6826***
(0.077)
Yes
Yes
0.2007
5927
0.0045***
(0.001)
1.2818***
(0.040)
Yes
Yes
0.2007
5927
1
(10-49) is the omitted size category. 2 (1-5) is the omitted age category. 3 Purely domestic is the omitted ownership category. 4 (InwardFDI
is related to the stock of inward FDI (in
manufacturing and services sectors)..Note: Infrastructure and stock of outward FDI variables were excluded due to multicollinearity. All PCA indices of business regulation were included in the
regression. However, only All_DoingBusiness and DB_Business_Operations were statistically significant. Significance: *** 1%, ** 5%, * 10%.
13
Although country specific determinants appear to matter most, firm specific determinants are
relevant as well. Two firm characteristics appear to be positively associated with productivity
growth in EU12: ownership and size. Ceteris paribus, foreign affiliated firms productivity
grows 2.9 percent more quickly than purely domestic firms in manufacturing and 2.7 percent
more quickly in services, while the difference is even more striking for Global headquarters
firms, whose productivity is 6.7 percent higher than purely domestic firms (in
manufacturing and 3.1 percent in services). The combination of the importance of foreign
ownership and the positive effect of inward FDI on productivity growth suggests a prominent
role for FDI in the emerging European economies. Indeed, Eastern Europe has received large
volumes of FDI since the 2004 EU expansion. Theory and experience indicate that openness
to foreign investment helped these economies generate employment, upgrade technology, and
improve managerial knowledge to accelerate productivity growth. In this regard, business
regulations play an important role in attracting FDI, even after controlling for market size and
factor endowments (Wagle, 2010; Demekas et al., 2007).
A second factor is size: almost 15 years since the beginning of the transition, small firms still
retain a productivity advantage vis--vis larger ones: this is valid in both manufacturing and
services. In particular the productivity of companies below 50 employees grows faster than
larger competitors.
4.2
EU15 Results
A similar analysis to that one performed for EU12 countries shows that among the more
developed EU15 nations, firm-level characteristics matter more than country-level variables.
The exclusion of country dummies from the regression on manufacturing firms reduces the
explanatory power of the model by 19 percent; for the service firms, the model loses 11
percent. Running the regression without firm characteristics reduces its explanatory power by
25 percent in both manufacturing and service. The detailed results are presented in Table 4.
Country-level variables remain a factor: locating in one country or another can net
productivity gains of up to 7 percent for manufacturing firms and 5 percent for services firms.
However, country performances differ widely across sectors: Norway realized the greatest
productivity growth in services but also the least growth in manufacturing.44
Table 5 presents the EU15 estimation results for Eq. (1). Ownership and size are important
correlates of productivity growth in the EU15 region.45 As expected, Global headquarters
firms grow more quickly than purely domestic firms: 2.3 percentage points more quickly in
manufacturing industries and 2.9 percentage points in service industries. Foreign-owned
firms also perform better than their purely domestic counterparts: 1.8 percent better in
manufacturing and 2.4 percent in services. Unlike in the EU12, size does matter in the EU15:
medium to large enterprises (between 50 and 500 employees) grow faster than their smaller
competitors, but also than their larger ones: this size advantage is 1.5 percent in
manufacturing, and 1.2 percent in services. Interestingly, age appears to be relevant: older
firms in services grow more quickly than the younger firms; in manufacturing however, age
is not statistically significant.
44
45
For a discussion of results from Sample 2, see Appendix V.2.

For a second method of evaluating the relative impact of firm-level variables, see Appendix X.
14
Table 4 - Decomposition of Explanatory Power: EU15 (Sample 1)

Manufacturing
All
no country
no firm/sector
All
no country
no firm/sector
0.0896***
-0.0815***
-0.0796***
-0.0850***
-0.0772***
-0.0743***
Ln(Prod)2003
(0.004)
(0.004)
(0.004)
(0.003)
(0.003)
(0.003)
1
0.0059**
0.0039
0.0057***
0.0042**
Size(50-249)
(0.003)
(0.003)
(0.002)
(0.002)
0.0148*
0.008
0.0118*
0.0087
Size(250-499) 1
(0.008)
(0.008)
(0.006)
(0.006)
-0.0046
-0.0124
-0.0081
-0.0126*
Size(500-999) 1
(0.013)
(0.013)
(0.008)
(0.008)
1
0.0037
0.0038
0.0256*
0.0256*
Size(1000+)
(0.013)
(0.013)
(0.015)
(0.015)
-0.0018
-0.0053
-0.003
-0.0057***
Age(6-10)2
(0.003)
(0.003)
(0.002)
(0.002)
0.0021
-0.0007
0.0016
0.0004
Age(11-20) 2
(0.003)
(0.003)
(0.002)
(0.002)
2
0.0031
0.0057*
0.0049**
0.0074***
Age(21-30)
(0.003)
(0.003)
(0.002)
(0.002)
2
0.0046
0.0104***
0.0065***
0.0085***
Age(>=31)
(0.003)
(0.003)
(0.002)
(0.002)
0.0228***
0.0260***
0.0287***
0.0285***
Global Head.3
(0.005)
(0.005)
(0.004)
(0.004)
0.0185***
0.0225***
0.0236***
0.0236***
Foreign aff. 3
(0.004)
(0.003)
(0.002)
(0.002)
-0.0001
-0.0077
0.0091*
0.0031
Belgium
(0.007)
(0.007)
(0.005)
(0.005)
0.0630***
-0.0728***
-0.0302***
-0.0414***
Spain
(0.005)
(0.005)
(0.004)
(0.004)
0.0224***
-0.0236***
-0.006
-0.0067*
France
(0.005)
(0.005)
(0.004)
(0.004)
0.0167***
-0.0291***
0.0089**
-0.0035
Italy
(0.005)
(0.005)
(0.004)
(0.004)
0.0723***
-0.0857***
0.0161***
0.0022
Norway
(0.009)
(0.009)
(0.005)
(0.005)
0.0306***
-0.0319***
-0.0074
-0.0113**
Sweden
(0.007)
(0.007)
(0.006)
(0.006)
1.0112***
0.8907***
0.9162***
0.9349***
0.8441***
0.8331***
_cons
(0.048)
(0.045)
(0.047)
(0.033)
(0.031)
(0.031)
Yes
Yes
No
Yes
Yes
No
NACE dummies
0.136
0.1105
0.1052
0.1115
0.0995
0.0851
R-squared
16,800
16,800
16,800
28,400
28,400
28,400
N. obs
1
(10-49) is the omitted size category; 2 (1-5) is the omitted age category; 3 Purely domestic is the omitted ownership category. Finland is the
omitted country. Significance: *** 1%, ** 5%, * 10%.
Country specific factors, although of lesser impact, matter as well. The quality of business
regulations is the common factor driving productivity growth in both manufacturing and
services. Improving business regulations produces gains in labor productivity growth, both in
manufacturing and in services. A one standard deviation increase in the overall business
regulation index leads to a 3.4 percent productivity increase for the average manufacturing
firm and a 1.7 percent increase for the average service firm. A one standard deviation
increase in the tax index correlates to a 3 percent increase in manufacturing and 2 percent in
services. A one standard deviation increase of the trade index leads to 3.16 and 2.10 percent
increases for manufacturing firms and service firms, respectively. A one standard deviation
increase in the employment regulation index raises labor productivity by 1.52 in
manufacturing and 1.42 percent in services.46
46
Results for the second sample are similar in sign and magnitude; See Appendix VIII.
15
Table 5. Firm-level Productivity Growth and Country-level time varying business indicators in the EU15
(1)
-0.0904***
(0.004)
0.0053*
(0.003)
0.0149*
(0.008)
-0.0051
(0.013)
0.0035
(0.013)
-0.0012
(0.003)
0.002
(0.003)
0.0054
(0.003)
0.0053
(0.003)
0.0213***
(0.005)
0.0175***
(0.004)
-0.0152***
(0.003)
0.005***
(0.001)
-0.0004**
(0.000)
0.0015***
(0.000)
0.0052***
(0.000)
Ln(Prod)2003
Size(50-249) 1
Size(250-499) 1
Size(500-999) 1
Size(1000+) 1
Age(6-10)2
Age(11-20)2
Age(21-30)2
Age(>=31)2
Global Head.3
Foreign aff.3
(InwardFDI
(OutwardFDI
(credit
Skills
(All_DoingBusiness
(DB_Business_operations
(2)
-0.0904***
(0.004)
0.0053*
(0.003)
0.0149*
(0.008)
-0.0051
(0.013)
0.0035
(0.013)
-0.0011
(0.003)
0.002
(0.003)
0.0054
(0.003)
0.0053
(0.003)
0.0213***
(0.005)
0.0175***
(0.004)
-0.0148***
(0.003)
0.008***
(0.000)
-0.0004**
(0.000)
0.0010***
(0.000)
Manufacturing
(3)
(4)
-0.0904***
-0.0904***
(0.004)
(0.004)
0.0054*
0.0053*
(0.003)
(0.003)
0.0149*
0.0149*
(0.008)
(0.008)
-0.0049
-0.005
(0.013)
(0.013)
0.0036
0.0036
(0.013)
(0.013)
-0.0013
-0.0012
(0.003)
(0.003)
0.002
0.002
(0.003)
(0.003)
0.005
0.0053
(0.003)
(0.003)
0.0058*
0.0055*
(0.003)
(0.003)
0.0216***
0.0214***
(0.005)
(0.005)
0.0179***
0.0176***
(0.004)
(0.004)
-0.0196***
-0.0145***
(0.003)
(0.003)
0.007***
0.005***
(0.000)
(0.00)
-0.0008**
-0.0005**
(0.000)
(0.000)
0.0013***
0.0004*
(0.000)
(0.000)
(5)
-0.0904***
(0.004)
0.0053*
(0.003)
0.0149*
(0.008)
-0.005
(0.013)
0.0036
(0.013)
-0.0012
(0.003)
0.002
(0.003)
0.0052
(0.003)
0.0057*
(0.003)
0.0215***
(0.005)
0.0177***
(0.004)
-0.0182***
(0.003)
0.008***
(0.000)
-0.0011**
(0.000)
0.0013***
(0.000)
(8)
-0.0850***
(0.003)
0.0057***
(0.002)
0.0118*
(0.006)
-0.0081
(0.008)
0.0256*
(0.015)
-0.003
(0.002)
0.0016
(0.002)
0.0049**
(0.002)
0.0065***
(0.002)
0.0287***
(0.004)
0.0236***
(0.002)
-0.0023**
(0.001)
0.001
(0.001)
-0.0005***
(0.000)
0.0011
(0.000)

(9)
(10)
-0.0850***
-0.0850***
(0.003)
(0.003)
0.0057***
0.0057***
(0.002)
(0.002)
0.0118*
0.0118*
(0.006)
(0.006)
-0.0081
-0.0081
(0.008)
(0.008)
0.0256*
0.0256*
(0.015)
(0.015)
-0.003
-0.003
(0.002)
(0.002)
0.0016
0.0016
(0.002)
(0.002)
0.0049**
0.0049**
(0.002)
(0.002)
0.0065***
0.0065***
(0.002)
(0.002)
0.0287***
0.0287***
(0.004)
(0.004)
0.0236***
0.0236***
(0.002)
(0.002)
-0.0023**
-0.0024*
(0.001)
(0.001)
0.003
0.003
(0.002)
(0.001)
-0.0005***
-0.0005***
(0.000)
(0.000)
0.0010
0.0009
(0.000)
(0.000)
(DB_Trading_across borders
0.0129**
(0.000)
0.0030***
(0.000)
(DB_Employing_workers
1.0143***
(0.049)
Yes
Yes
0.1318
16,800
(12)
-0.0850***
(0.003)
0.0057***
(0.002)
0.0118*
(0.006)
-0.0081
(0.008)
0.0256*
(0.015)
-0.003
(0.002)
0.0016
(0.002)
0.0049**
(0.002)
0.0065***
(0.002)
0.0287***
(0.004)
0.0236***
(0.002)
-0.0022**
(0.001)
0.001
(0.000)
-0.0005***
(0.000)
0.0008
(0.000)
-0.0024
(0.009)
0.0192***
(0.001)
(DB_PayingTaxes
1.0152***
(0.049)
Yes
Yes
0.1318
16,800
(11)
-0.0850***
(0.003)
0.0057***
(0.002)
0.0118*
(0.006)
-0.0081
(0.008)
0.0256*
(0.015)
-0.003
(0.002)
0.0016
(0.002)
0.0049**
(0.002)
0.0065***
(0.002)
0.0287***
(0.004)
0.0236***
(0.002)
-0.0023**
(0.001)
0.002
(0.001)
-0.0005***
(0.000)
0.0011
(0.000)
0.002**
(0.000)
-0.0163***
(0.002)
(DB_Permits
NACE dummies
Country dummies
R-squared
N. obs
(7)
-0.0850***
(0.003)
0.0057***
(0.002)
0.0118*
(0.006)
-0.0081
(0.008)
0.0256*
(0.015)
-0.003
(0.002)
0.0016
(0.002)
0.0049**
(0.002)
0.0065***
(0.002)
0.0287***
(0.004)
0.0236***
(0.002)
-0.0022**
(0.001)
0.003
(0.001)
-0.0005***
(0.000)
0.0011
(0.000)
0.003**
(0.000)
0.0041***
(0.000)
_cons
(6)
-0.0895***
(0.004)
0.0060**
(0.003)
0.0148*
(0.008)
-0.0047
(0.013)
0.0036
(0.013)
-0.0017
(0.003)
0.0022
(0.003)
0.003
(0.003)
0.0042
(0.003)
0.0228***
(0.005)
0.0184***
(0.004)
-0.0213***
(0.003)
0.0024***
(0.001)
-0.0006**
(0.000)
0.0025***
(0.000)
1.0137***
(0.049)
Yes
Yes
0.1327
16,800
1.0149***
(0.049)
Yes
Yes
0.1321
16,800
1.0134***
(0.049)
Yes
Yes
0.1324
16,800
0.002**
(0.000)
0.0031***
(0.000)
0.9790***
(0.049)
Yes
Yes
0.136
16,800
0.9571***
(0.034)
Yes
Yes
0.1115
28,360
0.9570***
(0.034)
Yes
Yes
0.1115
28,360
0.9566***
(0.034)
Yes
Yes
0.1115
28,360
0.9569***
(0.034)
Yes
Yes
0.1115
28,360
0.9567***
(0.034)
Yes
Yes
0.1115
28,360
0.0029**
(0.000)
0.9576***
(0.034)
Yes
Yes
0.1115
28,360
(10-49) is the omitted size category. 2 (1-5) is the omitted age category. 3 Purely domestic is the omitted ownership category. 4 (InwardFDI
((OutwardFDI
) is related to the stock of
inward (outward) FDI in manufacturing and services sectors.
Note: The variables for infrastructure and stock of outward FDI were excluded due to multicollinearity. All PCA indices of business regulation were included in the analysis. However, only
all_DB and DB_business_operations were statistically significant. Significance: *** 1%, ** 5%, * 10%.
16
Two additional factors drive productivity growth in manufacturing, but are not significant in
services: the skills of the workforce and FDI outflows. Foreign investments from EU15
towards Eastern Europe and other emerging economies are the helping hand which
manufacturing firms receive from the opportunities for outsourcing to cheaper countries and
in particular toward the EU12 ones.47
Two apparently counterintuitive results are worth commenting: the negative correlation
between the country level availability of credit and the inflows of FDI and productivity
growth at firm level, for both manufacturing and services in EU15. As far as credit is
concerned, a few explanations can be given. During a credit expansion phase like the one
ending in 2008, the allocation of credit might be skewed toward cyclical sectors, like
construction, while individual firms might still face credit constraints (quote paper at ECB).
The result is robust when considering the larger sample of countries for firms above 50
employees.
The negative effect of the inflows of FDI and firm level productivity is only present in
sample 1. This could be explained by the fact that smaller firms are negatively affected by
competition from abroad, which reduces their margins, without being compensated by the
positive spillovers arising from the presence of foreign competitors, in particular in the form
of technology absorption and openness to new markets. This result should be interpreted in
connection with the positive productivity bias enjoyed by foreign firms.
4.3
EU15 South48
With the results presented above in mind, one should try to interpret the productivity
contraction experienced between 2003 and 2008 by Europe southernmost countriesGreece,
Italy, Portugal, and Spain.
Figure 4 Distribution of Firm Population, Employment, and Value-added, 2007
Employment
2.6
5.6
Value added
millions of individuals
8.3
3.1
0.7
0% 2%0%
1% 0%1% 0%1% 0%
5%
1% 4%
9%
9%
9%
0.3
2% 0%
billions of 2005 US$
23.9 46.7 35.5 15.4
11%
5.9
20%
1,715 3,099 1,583 332
53
Large
(250+)
29%
Medium
(50249)
26%
Small
(1049)
16%
17%
Micro
(19)
28%
29%
38%
45%
43%
43%
32
27%
22%
31%
43%
2.0
North
million firms
South
Firm population
41%
14%
26%
19%
18%
90%
89%
94%
16%
95%
89%
17%
24%
23%
18%
87%
19%
19%
23%
22%
23%
21%
24%
15%
27%
17%
19%
20%
19%
15%
20%
44%
35%
EU15
EU12
EU15
Source:WorldBankstaffcalculationsbasedonEurostat.
EU12
EU15
Continental
21%
South
North
Continental
24%
North
South
Continental
South
North
31%
24%
23%
Continental
North
South
Continental
South
Continental
North
22%
EU12
47
See Marin (2009).

The analysis of this sub set of EU15 countries uses complementary analytical tools, such as basic
figures/correlations and summary statistics. As Section 4.2 already covers the whole set of EU15 countries while
controlling for country-level disparities (through the inclusion of country dummies) there would be not much
country structural differences if the same econometric model was ran only for Spain, Italy and Portugal (the
EU15 south countries for which data is available).
48
17
The first reason lies may lie in their mix of firms. The distribution of firm size in the EU15
South is skewed towards microenterprises; very small, family-operated firms play a much
greater role in the economies of Southern Europe than in the other developed economies of
Western Europe. Microenterprises account for roughly one third of all value-added generated
in the EU15 South and employ roughly half the workforce. When small and medium
enterprises are added to microenterprises, they together employ four out of five workers in
Southern Europe. These figures are nearly double those in the rest of Europe, where larger
enterprises play a more significant role (Figure 4).
Second, the more limited internationalization of firms in Southern Europe also contributes to
explain lower productivity growth. According to the Amadeus sample, the share of firms in
Southern Europe with international connections is far lower than the rest of the EU15. This is
true for all size classes, but it is compounded by the size distribution of firms in Southern
Europe, skewed toward smaller enterprises and by definition less prone to
internationalization (see Figure 5).
Figure 5 Internationalization of firms in Europe, 2007
Source:WorldBankstaffcalculationsbasedonAmadeus
Finally, EU15 South also suffers from unfavorable country characteristics (see Figure 6). In
comparison to rest of the EU15, the EU15 South rated consistently lower in regulatory
indices, skills of the workforce and outward FDI. These structural elements are fundamental
to nurture domestic firms that invested abroad, gained access to lower costs production
environments and increased demand for their outputs in foreign markets (Antras and
Helpman, 2004).
18
Figure 6 Policy Variables in the EU15

Business
operations
index
2009
Finland
Quality of
infrastructure
% with tertiary
education; 2009
Index by WEF;
2008
82
Sweden
France
Skills of
workforce
35
87
80
Spain
69
Italy
73
16
30
29
32
37
127
44
27
108
37
24
203
105
Mfg and
services; % of
GDP 08
17
86
Outward FDI
stock
Mfg and
credit to priv
sector; % of GDP services; % of
GDP 08
08
32
Inward FDI
stock
Access to
credit
21
Source:WorldBankstaffcalculationsbasedonDoingBusiness,WorldEconomicForum,WorldDevelopmentIndicators,Eurostat.
5.
Conclusion
Using a panel of micro-data on firms from 12 EU countries49 from 2003 to 2008, this paper
addresses the confusing proliferation of suggested determinants of productivity growth and
seeks to provide clear policy implications. The literature has generated theories attributing
growth to country, industry, firm, and even product characteristics. Studies have thus far
found support for each of these, but have failed to determine which among the many
correlates are most critical for growth. We specify a model incorporating initial conditions,
firm age, size, international affiliation, business environment indices, and FDI to assess the
relative importance of each in explaining growth in labor productivity. We divide our sample
into two groups, New Europe and Old, and obtain results for each.
In the economies of the EU12, country-level variables dominatethe most important of
which are the stock of inward FDI, business regulations facilitating foreign investment, and
the availability of private credit. The most important firm-level characteristic is international
affiliation, either as headquarters of a multinational corporation or as subsidiary of a foreign
firm. These results suggest that accession to the EU has been beneficial for new members
because the ease with which foreign firms may now penetrate these new markets has
facilitated the transfer of technology and the diffusion of best practices. The clear policy
implication is that developing countries may realize significant productivity gains by taking
the relatively easy steps of improving their regulatory regimes and creating environments
attractive to inward FDI before addressing the more costly requirements of improving
infrastructure and better educating their workforces.
With the EU15, firm-level characteristics dominate. Among these, the most critical are
international affiliation and firm size. The most important country-level factor is outward
FDI. Taken together, these results argue strongly for the role played by multinational
corporations in driving productivity growth in developed countries. Thus, it is not surprising
that firm size contributes to productivity growth in the EU15: as the large amount of FDI
shows, firms in Western Europe are transforming themselves into headquarters of
multinational corporations, and thus require more personnel to manage their global interests.
49
For sample 2 (with firms with at least 50 employees), the sample comprises 17 countries.
19
However, the success of the EU15 was not shared equally by all member countries. The four
southernmost nations of Greece, Italy, Portugal, and Spain suffered productivity losses. Our
analysis suggests that the failure of these nations to perform may be attributed to
disadvantageous and restrictive regulatory regimes, leading to a relative preponderance of
small- and medium-size firms. These factors discourage international participation and
sharply limit the EU15 Souths ability to benefit from knowledge transfers from abroad,
economies of scale, and production-reallocation efficiencies. However, these states may still
achieve gains by reforming their regulatory regimes to encourage the expansion of outward
FDI.
The experience of the EU15 South in relation to the rest of the EU15 raises an interesting
implication for the EU12. While this paper divides Old and New Europe into two separate
regions, implying at some level a fundamental difference, it may be that this difference is not
necessarily intrinsic. Indeed, as Demekas et al. (2007) suggest, it may simply be the case that
different characteristics matter more at different levels of economic development. The
research remains to be done to find exactly at what point of development country-level
attributes become less important than firm-level characteristics in predicting productivity
growth, and how all these factors interact.
20
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22
Appendix I. Nonparametric Density Estimations of Annualized Labor Productivity

Growth by Region, 2003-2008
Sample 2
density
2
density
2
Sample 1
-1
-.5
0
Annual growth (%)
EU15
.5
-1
-.5
0
Annual Growth (%)
EU15
EU12
.5
EU12
Appendix II. Annual Growth Rate at Firm Level (in %), 2003-2008
Sample 1
EU15
EU12
sample2
EU15
EU12
Mean
Std. Dev
p5th
p95th
1.5
7.0
14.4
23.3
-14.5
-22.2
19.1
48.2
1.8
6.3
16.7
19.8
-14.4
-17.9
19.7
35.9
23
Appendix III. Re-sampling Procedure

Amadeus coverage does not necessarily reflect the underlying population distribution of
firms across size classes, sectors, and countries. One reason behind this lack of
representativeness is the fact that the Amadeus data only include balance-sheet information
and income statements for companies above a certain size. Therefore, the data tend to be
skewed in favor of medium and large firms. In addition, not all firms in the database report
all critical output and input variables, reducing the number of firms for which labor
productivity and total factor productivity can be estimated. This introduces a potential bias
when calculating productivity figures, as the final sample may not be representative of the
population distribution of firms in the country.
In order to ensure representativeness of the firm-level samples used in the paper, and align
them with the distribution of the underlying firm population at the country, sector and size
levels, the Amadeus dataset was re-sampled using a three step re-sampling method.
First, using population distribution figures for firms above 10 employees from the Eurostat
Structural Business Statistics database for the year 2006, a sample size of 150,000 firms was
designed using three stratification criteria: size (1019, 2049, 50249, and 250+), sector
(NACE 1.1), and country.
Second, including only firms for which at least three years of information on value added was
available, random draws (without replacement) were taken for each size-sector-country
stratum in the sample according to the population distribution figures. Table IV.1 presents the
ratio, by country and size strata, of the targeted number of companies to the number of
sampled firms.
Third, two samples were defined. Sample 1 (firms with more than 10 employees) contains
countries for which the ratio between the number of sampled firms and the number of
population firms was at least 80 percent per size class. Sample 2 (firms with more than 50
employees) contains countries for which the related ratio was at least 60 percent of size class.
Table IV.1 - Firm Population Versus Estimation Sample after Resampling
Country
Austria
Belgium
Bosnia and Herzegovina
Bulgaria
Croatia
Czech Rep
Estonia
Finland
France
Germany
Greece*
Hungary
Ireland*
Italy
Latvia
Lithuania
FYR Macedonia
Netherlands
Norway
Poland
Portugal
Romania
Serbia
Slovak Rep
Slovenia
Spain
Sweden
Ukraine
United Kingdom
Size class (%)

10-19
0.4
100.0
70.7
43.0
99.9
74.1
99.9
99.9
99.9
2.4
0.0
1.2
0.0
95.4
1.2
0.0
0.0
10.0
93.1
68.7
57.3
99.9
100.0
33.9
90.6
100.0
99.9
91.9
34.1
20-49
1.0
100.3
100.4
72.6
99.8
89.4
99.7
99.2
99.9
12.1
0.0
1.8
0.0
100.0
2.4
0.0
0.0
53.7
94.8
85.8
62.9
99.9
99.9
24.0
97.2
100.0
100.2
97.2
88.9
50-249
4.3
99.8
99.6
95.0
100.7
97.6
98.4
98.3
100.1
61.2
0.0
6.8
0.0
100.1
12.3
0.0
5.4
51.6
95.4
99.6
90.1
99.9
100.3
96.8
100.5
100.1
99.9
100.0
100.1
250+
11.0
99.4
94.7
86.9
98.7
94.1
78.4
98.3
99.9
92.6
0.0
23.9
0.0
99.2
36.1
0.0
0.0
61.6
79.0
100.2
98.8
96.2
100.3
95.7
96.6
99.6
98.4
97.0
99.8
Total
1.4
100.0
79.0
62.0
99.9
83.2
99.1
99.4
99.9
15.3
0.0
2.6
0.0
97.0
4.0
0.0
0.2
36.1
93.5
83.4
63.6
99.8
100.0
45.5
94.4
100.0
99.9
94.0
58.9
Source: World Bank staff calculations based on Amadeus and Eurostat

*For Greece and Ireland, Amadeus does not provide information on valued added.
24
Appendix IV. Doing Business Principal Component Analysis (PCA)

Doing Business variables cover ten topics: starting a business, dealing with construction
permits, registering property, getting credit, protecting investors, paying taxes, trading across
borders, enforcing contracts, employing workers, and closing a business. Each of these
indicators is constructed on several sub-indicators, such as procedures, time, and required
cost to start a business. The variables included in this analysis are indices created using a
principal component analysis (PCA) for each Doing Business topic. The PCA indices are
linear combinations of Doing Business sub-indicators, where each sub-indicator is optimally
weighted to maximize indicator variance. All indices are coded such that a higher number
indicated more complex and inhibitive regulation on a scale of 0 to 100.
We use the PCA methodology to construct an index of all the Doing Business variables. We
further create an index measuring the difficulties associated with operating and maintaining a
business. Business operations includes variables for paying taxes, trading across borders,
employing workers, and obtaining construction permits. Paying taxes indicates the tax
burdens faced by a typical medium-sized company and includes a measure of the
administrative costs of compliance. Trading across borders measures the procedural burden
of exporting and importing a standardized cargo of goods by counting the number of required
documents such shipment requiresfrom the contractual agreement between the two parties
to the delivery of goodsalong with the time necessary for completion. Employing workers
measures difficulties in hiring, required redundancy in workers, and the rigidity of working
hours. Construction permits measures the total cost of building a warehouse, including
necessary licenses and permits, completing required notifications and inspections, and
connecting utilities.
To verify the quality of the PCA indicator, we compare it with an alternative measure of the
quality of business regulation, the Product Market Regulation indicators constructed by the
Organisation for Economic Co-operation and Development (OECD 2011). Results indicate a
strong correlation (0.74) between our synthetic all Doing Business variable and that of the
OECD for the countries covered by both databases. The OECD indices do not
comprehensively cover Europe annually, hence the construction of Doing Business indices.
25
Appendix V. Results for Sample 2 (firms with more than 50 employees)

V.1
EU12
When performing the exclusion exercise with the sample of surviving firms with a minimum
of 50 employees, the results show a slightly different picture: country and firm characteristics
are equally important. In fact, in the regression for manufacturing industries, excluding the
country dummies reduces the explanatory power of the model by 19 percent; dropping firm
characteristics variables reduces the explanatory power of the model by 15 percent. In the
services industry, dropping country fixed-effects reduces the explanatory power by 13
percent while the exclusion of firm characteristics leads to a reduction of 16 percent. Country
dummies also differ greatly from one another suggesting similar companies have different
performance in different countries. A manufacturing firm in the Czech Republic on average
grows 0.9 percentage points faster than a similar manufacturer in Slovenia.
Results from the counterfactual exercise comparing how the estimated country dummies
change when adding each one of the firm variables for Sample 2 corroborate the results from
Sample 1. First, firm ownership still appears as the most relevant characteristic for explaining
productivity growth in the EU12. Foreign-owned firms grow faster than purely domestic
ones, both in manufacturing and in services (1.2 and 2.2 percent more, respectively). Globalheadquarter firms also grow more in comparison with purely domestic firms: 3.6 percent
more in manufacturing and 3.9 percent in services. Again, size seems to matter less, though
larger firms do grow more slowly in productivity, particularly in manufacturing. Finally, age
has the opposite effect on productivity depending on the industry. In manufacturing, older
firms grow more quickly: firms between 21 and 30 years old grow on average 3.4 percent
more than firms less than 6 years old. In services, the opposite happens: firms older than 31
years grow on average 3.7 percent more slowly than the youngest group.
Performing the same counterfactual exercise between a Czech manufacturing firm and a
Slovenian manufacturing firm again supports the previous results. The average productivity
gap between a Czech and Slovenian firm with more than 50 employees in manufacturing is
2.7 percent. However, if considering two firms with the same baseline productivity, this gap
falls to 1.8 percent. When limiting the observation to two firms with the same sector
specialization, the gap is unaffected (1.7 percent). Finally, if the two firms share the same
ownership, size, and age composition, the gap falls to 0.9 percent. The remaining effect is
then country specific. Results are available upon request.
V.2
EU15
For both manufacturing and services industries, the firm-level characteristics matter most.
Excluding firm characteristics from the manufacturing and services models reduces their
explanatory power by 22 and 25 percent, respectively. When dropping country fixed-effects
the models lose less of their explanatory power: 20 in manufacturing and 13 percent in
services. See Appendix VI.
Results of the exclusion exercise from Sample 2 do not differ significantly from those of
Sample 1. Again, ownership, size and age are important firm characteristics for productivity.
Foreign-affiliated firms grow more quickly: 1.9 percentage points for global headquarters in
manufacturing and 2.61 percentage points for services. Size is also important in Western
Europe: larger firms grow more rapidly in productivity. Firms that have more than 1,000
employees experienced greater productivity growth than firms with 50 to 249 employees.
Again, older firms in service sectors grow more than younger firms; in manufacturing, age is
not statistically significant.
26
The counterfactual exercise using an Italian and a Finnish manufacturing firm shows very
similar results for Sample 2. An average Finnish firm with more than 50 employees grows
2.3 percentage points more rapidly than does a similarly sized Italian firm. Regarding two
firms in the same sector, the gap would fall to 2.1 percentage points. Finally, if the two firms
were identical in ownership, size, and age, the gap would fall to 1.6 percentage points. The
remaining effect is country specific. Country effects may cause differences in productivity
growth of up to 9.6 percentage points in manufacturing and 8.4 in services. Again, country
performances differ widely across sectors: Norway leads in terms of productivity growth in
services, but is among the slowest-improving countries in manufacturing. See Appendix VII.
27
Appendix VI. Decomposition of Explanatory Power: EU15 (sample 2)

Manufacturing
All
no country
no firm/sector
All
no country
no firm/sector
-0.0943***
-0.0829***
-0.0806***
-0.0782***
-0.0703***
-0.0652***
Ln(Prod)2003
(0.008)
(0.008)
(0.008)
(0.007)
(0.006)
(0.006)
0.0055
0.0073
-0.0021
0.0005
Size(250-499) 1
(0.006)
(0.006)
(0.004)
(0.004)
0.0096
0.0115
-0.0058
-0.0032
Size(500-999) 1
(0.008)
(0.009)
(0.006)
(0.006)
0.0414***
0.0478***
0.0221***
0.0289***
Size(1000+)
(0.010)
(0.010)
(0.009)
(0.009)
-0.0105
-0.0126
-0.0094
-0.0119**
Age(6-10)
(0.008)
(0.008)
(0.006)
(0.006)
-0.004
-0.0058
0.0033
0.0008
Age(11-20)
(0.008)
(0.008)
(0.005)
(0.005)
-0.0002
-0.0037
0.0023
-0.0015
Age(21-30)
(0.007)
(0.007)
(0.005)
(0.005)
0.0022
-0.005
0.0116**
0.0013
Age(>=31)
(0.007)
(0.007)
(0.006)
(0.005)
0.0199***
0.0137***
0.0261***
0.0178***
Global Head.
(0.005)
(0.005)
(0.006)
(0.005)
0.0151***
0.0113**
0.0259***
0.0204***
Foreign aff.
(0.006)
(0.005)
(0.004)
(0.004)
-0.0101
-0.0158
-0.0046
-0.0007
Belgium
(0.011)
(0.011)
(0.010)
(0.010)
-0.0162**
-0.0154**
0.0089
0.008
Germany
(0.007)
(0.008)
(0.009)
(0.009)
-0.0606***
-0.0660***
-0.0245***
-0.0338***
Spain
(0.008)
(0.008)
(0.009)
(0.009)
-0.0262***
-0.0231***
-0.0068
-0.002
France
(0.007)
(0.007)
(0.008)
(0.009)
-0.0595***
-0.0531***
-0.0318***
-0.0179**
Great Britain
(0.009)
(0.009)
(0.009)
(0.009)
-0.0161*
-0.0240***
0.01
0.0008
Italy
(0.008)
(0.008)
(0.009)
(0.009)
-0.0565***
-0.0730***
0.0219*
0.0073
Norway
(0.021)
(0.020)
(0.013)
(0.012)
-0.1067***
-0.1179***
-0.0624***
-0.0694***
Portugal
(0.012)
(0.012)
(0.010)
(0.011)
-0.019
-0.0188
-0.0086
-0.008
Sweden
(0.014)
(0.014)
(0.013)
(0.013)
1.0821***
0.9256***
0.9342***
0.8712***
0.7821***
0.7406***
_cons
(0.091)
(0.085)
(0.088)
(0.072)
(0.069)
(0.065)
Yes
Yes
No
Yes
Yes
No
NACE dummies
0.1515
0.1203
0.1186
0.1127
0.0981
0.0841
R-squared
4775
4775
4775
6316
6316
6316
N. obs
1
(50249) is the omitted size category, 2 (15) is the omitted age category, 3 Purely domestic is the omitted ownership category. Finland is
the omitted country. Significance: *** 1%, ** 5%, * 10%.
28
Appendix VII. Firm-level Productivity Growth in the EU15 (Sample 2)

Manufacturing
Ln(prod) 2003
Size(250-499) 1
Size(500-999) 1
Size(1000+)
Age(6-10)
Age(11-20)
Age(21-30)
Age(>=31)
Global Head.
Foreign aff.
Belgium
Germany
Spain
France
Great Britain
Italy
Norway
Portugal
Sweden
_cons
NACE dummies
R-squared
N. obs
1
All controls
(1)
-0.0943***
(0.008)
0.0055
(0.006)
0.0096
(0.008)
0.0414***
(0.010)
-0.0105
(0.008)
-0.004
(0.008)
-0.0002
(0.007)
0.0022
(0.007)
0.0199***
(0.005)
0.0151***
(0.006)
-0.0101
(0.011)
-0.0162**
(0.007)
-0.0606***
(0.008)
-0.0262***
(0.007)
-0.0595***
(0.009)
-0.0161*
(0.008)
-0.0565***
(0.021)
-0.1067***
(0.012)
-0.019
(0.014)
1.0821***
(0.091)
Yes
0.1515
4775
Ownership +
sector+
baseline
prod+
country
dummies
(2)
-0.0924***
(0.008)
0.0228***
(0.005)
0.0180***
(0.005)
-0.0106
(0.011)
-0.0125*
(0.007)
-0.0604***
(0.008)
-0.0235***
(0.007)
-0.0556***
(0.008)
-0.0152*
(0.008)
-0.0590***
(0.020)
-0.1046***
(0.011)
-0.0176
(0.013)
1.0596***
(0.091)
Yes
0.1475
4775
Sector+
baseline prod+
country dummies
(3)
-0.0888***
(0.008)
-0.0117
(0.011)
-0.0173**
(0.007)
-0.0656***
(0.008)
-0.0237***
(0.007)
-0.0525***
(0.008)
-0.0211***
(0.008)
-0.0654***
(0.020)
-0.1083***
(0.012)
-0.0194
(0.013)
1.0302***
(0.090)
Yes
0.1428
4775
Baseline
prod +
country
dummies
(4)
-0.0806***
(0.008)
-0.0158
(0.011)
-0.0154**
(0.008)
-0.0660***
(0.008)
-0.0231***
(0.007)
-0.0531***
(0.009)
-0.0240***
(0.008)
-0.0730***
(0.020)
-0.1179***
(0.012)
-0.0188
(0.014)
0.9342***
(0.088)
No
0.1186
4775
Only
country
dummies
(5)
-0.0407***
(0.011)
-0.0376***
(0.007)
-0.0659***
(0.009)
-0.0176**
(0.008)
-0.0510***
(0.011)
-0.0233***
(0.009)
-0.1161***
(0.020)
-0.0612***
(0.011)
-0.0006
(0.015)
0.0502***
(0.007)
No
0.0173
4803
All controls
(6)
-0.0782***
(0.007)
-0.0021
(0.004)
-0.0058
(0.006)
0.0221***
(0.009)
-0.0094
(0.006)
0.0033
(0.005)
0.0023
(0.005)
0.0116**
(0.006)
0.0261***
(0.006)
0.0259***
(0.004)
-0.0046
(0.010)
0.0089
(0.009)
-0.0245***
(0.009)
-0.0068
(0.008)
-0.0318***
(0.009)
0.01
(0.009)
0.0219*
(0.013)
-0.0624***
(0.010)
-0.0086
(0.013)
0.8712***
(0.072)
Yes
0.1127
6316

Ownership +
sector+
baseline
Baseline
Sector+
prod+
prod +
baseline prod+
country
country dummies
country dummies
dummies
(9)
(8)
(7)
-0.0774***
-0.0738***
-0.0652***
(0.007)
(0.006)
(0.006)
0.0268***
(0.005)
0.0259***
(0.004)
-0.0038
(0.010)
0.0109
(0.009)
-0.0257***
(0.009)
-0.0035
(0.008)
-0.0241***
(0.009)
0.0103
(0.009)
0.0188
(0.012)
-0.0618***
(0.010)
-0.0073
(0.013)
0.8656***
(0.071)
Yes
0.1102
6316
-0.0037
(0.010)
0.0061
(0.009)
-0.0312***
(0.009)
-0.0027
(0.008)
-0.0179**
(0.009)
0.0045
(0.009)
0.0128
(0.012)
-0.0655***
(0.010)
-0.0089
(0.013)
0.8381***
(0.070)
Yes
0.104
6316
-0.0007
(0.010)
0.008
(0.009)
-0.0338***
(0.009)
-0.002
(0.009)
-0.0179**
(0.009)
0.0008
(0.009)
0.0073
(0.012)
-0.0694***
(0.011)
-0.008
(0.013)
0.7406***
(0.065)
No
0.0841
6316
Only
country
dummies
(10)
-0.0265**
(0.010)
-0.0180**
(0.009)
-0.0262***
(0.009)
-0.0085
(0.009)
-0.0202**
(0.009)
-0.007
(0.009)
-0.0039
(0.014)
-0.0403***
(0.011)
-0.001
(0.012)
0.0349***
(0.008)
No
0.0028
6391
(50249) is the omitted size category. 2 (15) is the omitted age category. 3 Purely domestic is the omitted ownership category. Finland is the omitted country. Significance: *** 1%, ** 5%, * 10%
29
Appendix VIII. Firm-level Productivity Growth and Changes in Country Characteristics in the EU15 (Sample 2)
Ln(Prod)2003
Size(250-499) 1
Size(500-999) 1
Size(1000+) 1
Age(6-10)2
Age(11-20)2
Age(21-30)2
Age(>=31)2
Global Head.3
Foreign aff.3
var0308_instock_gdp4
var0308_outstock_gdp4
var0308_credit_gdp
var0308_skills
var0308_all_DB
(1)
-0.0892***
(0.008)
0.0038
(0.006)
0.006
(0.008)
0.0375***
(0.010)
-0.0112
(0.008)
-0.0043
(0.008)
0.0012
(0.007)
0.0032
(0.007)
0.0199***
(0.005)
0.0170***
(0.006)
-0.0021
(0.002)
0.0052***
(0.002)
-0.0007***
(0.000)
0.0003
(0.000)
0.0018**
(0.000)
(2)
-0.0893***
(0.008)
0.0038
(0.006)
0.0059
(0.008)
0.0375***
(0.010)
-0.0112
(0.008)
-0.0041
(0.008)
0.0012
(0.007)
0.0029
(0.007)
0.0197***
(0.005)
0.0167***
(0.006)
-0.0025
(0.002)
0.0055***
(0.002)
-0.0006***
(0.000)
0.0004
(0.000)
Manufacturing
(3)
(4)
-0.0908***
-0.0893***
(0.008)
(0.008)
0.0032
0.004
(0.006)
(0.006)
0.0054
0.0063
(0.008)
(0.008)
0.0359***
0.0382***
(0.010)
(0.010)
-0.0115
-0.011
(0.008)
(0.008)
-0.0036
-0.0041
(0.008)
(0.008)
0.0022
0.001
(0.007)
(0.007)
0.0034
0.0026
(0.007)
(0.007)
0.0204***
0.0194***
(0.005)
(0.005)
0.0177***
0.0161***
(0.005)
(0.006)
-0.0004
-0.0040*
(0.002)
(0.002)
0.0032**
0.0063***
(0.001)
(0.002)
-0.0006***
-0.0007***
(0.000)
(0.000)
0.0001
0.0010**
(0.000)
(0.000)
(5)
-0.0894***
(0.008)
0.0037
(0.006)
0.0059
(0.008)
0.0373***
(0.010)
-0.0112
(0.008)
-0.0041
(0.008)
0.0014
(0.007)
0.003
(0.007)
0.0198***
(0.005)
0.0168***
(0.006)
-0.002
(0.002)
0.0052***
(0.002)
-0.0007***
(0.000)
0.0003
(0.000)
services(except construction)
(9)
(10)
-0.0771***
-0.0778***
(0.007)
(0.007)
-0.003
-0.0023
(0.004)
(0.004)
-0.0079
-0.0061
(0.006)
(0.006)
0.0195**
0.0213**
(0.009)
(0.009)
-0.0097
-0.0091
(0.006)
(0.006)
0.0032
0.0033
(0.005)
(0.005)
0.0027
0.0012
(0.005)
(0.005)
0.0103*
0.0079
(0.006)
(0.006)
0.0258***
0.0243***
(0.005)
(0.005)
0.0264***
0.0243***
(0.004)
(0.004)
-0.0050***
-0.0051***
(0.001)
(0.001)
0.0017**
-0.0005
(0.001)
(0.001)
-0.0002***
-0.0005***
(0.000)
(0.000)
0.0002
0.0012***
(0.000)
(0.000)
0.0104***
(0.002)
0.0016***
(0.000)
var0308_Trade_
var0308_Empl
1.0010***
(0.089)
Yes
Yes
0.1394
4775
(12)
-0.0771***
(0.007)
-0.0031
(0.004)
-0.0079
(0.006)
0.0196**
(0.009)
-0.0097
(0.006)
0.0032
(0.005)
0.0028
(0.005)
0.0105*
(0.006)
0.0258***
(0.005)
0.0265***
(0.004)
-0.0055***
(0.001)
0.0020***
(0.001)
-0.0002***
(0.000)
0.0002
(0.000)
0.0013
(0.002)
0.0057***
(0.001)
1.0012***
(0.090)
Yes
Yes
0.139
4775
(11)
-0.0775***
(0.007)
-0.0026
(0.004)
-0.007
(0.006)
0.0202**
(0.009)
-0.0092
(0.006)
0.0034
(0.005)
0.0019
(0.005)
0.0079
(0.006)
0.0243***
(0.005)
0.0247***
(0.004)
-0.0064***
(0.001)
0.0008
(0.001)
-0.0002***
(0.000)
0.0001
(0.000)
0.0015***
(0.000)
var0308_Tax_
(8)
-0.0775***
(0.007)
-0.0025
(0.004)
-0.0068
(0.006)
0.0204**
(0.009)
-0.0092
(0.006)
0.0033
(0.005)
0.0015
(0.005)
0.0079
(0.006)
0.0244***
(0.005)
0.0246***
(0.004)
-0.0059***
(0.001)
0.0004
(0.001)
-0.0002***
(0.000)
0.0002
(0.000)
0.0047*
(0.003)
var0308_Permit_
NACE dummies
Country dummies
R-squared
N. obs
(7)
-0.0775***
(0.007)
-0.0025
(0.004)
-0.0067
(0.006)
0.0207**
(0.009)
-0.0093
(0.006)
0.0032
(0.005)
0.0012
(0.005)
0.0082
(0.006)
0.0246***
(0.005)
0.0248***
(0.004)
-0.0068***
(0.001)
0.0006
(0.001)
-0.0003***
(0.000)
0.0001
(0.000)
0.0021***
(0.001)
0.0016***
(0.000)
var0308_group2_DB
_cons
(6)
-0.0901***
(0.008)
0.0037
(0.006)
0.0062
(0.008)
0.0368***
(0.010)
-0.0114
(0.008)
-0.0045
(0.008)
0.0012
(0.007)
0.0039
(0.007)
0.0211***
(0.005)
0.0185***
(0.005)
-0.0012
(0.003)
0.0032**
(0.001)
-0.0006***
(0.000)
0.0003
(0.000)
1.0168***
(0.087)
Yes
Yes
0.1385
4775
1.0016***
(0.089)
Yes
Yes
0.1404
4775
1.0038***
(0.089)
Yes
Yes
0.1392
4775
0.0011***
(0.000)
0.0015
(0.001)
1.0134***
(0.088)
Yes
Yes
0.1381
4775
0.8740***
(0.072)
Yes
Yes
0.1097
6,316
0.8738***
(0.072)
Yes
Yes
0.1097
6,316
0.8642***
(0.073)
Yes
Yes
0.1085
6,316
0.8824***
(0.073)
Yes
Yes
0.1108
6,316
0.8747***
(0.072)
Yes
Yes
0.1096
6,316
0.0002
(0.000)
0.8657***
(0.073)
Yes
Yes
0.1085
6,316
(1049) is the omitted size category. 2 (15) is the omitted age category. 3 Purely domestic is the omitted ownership category. 4 var0308_instock_gdp(var0308_outstock_gdp) is related to the
stock of inward (outward) FDI in the manufacturing industry. var0308_instock_gdp(var0308_outstock_gdp) is related to the stock of inward (outward) FDI in the services industry.
Note: The variables for infrastructure and stock of outward FDI were excluded due to multicollinearity.
30
Appendix IX. Firm-level Productivity Growth in the EU12

Manufacturing
Ln(prod) 2003
Size(50-249) 1
Size(250-499) 1
Size(500-999) 1
Size(1000+) 1
Age(6-10)2
Age(11-20) 2
Age(21-30) 2
Age(>=31) 2
Global Head3.
Foreign aff.
Czech Rep.4
Estonia
Poland
Romania
_cons
NACE dummies
R-squared
N. obs
1
All controls
(1)
-0.1237***
(0.005)
-0.0156**
(0.007)
-0.0530***
(0.012)
-0.0229
(0.019)
-0.0582**
(0.029)
-0.001
(0.009)
-0.0027
(0.009)
0.0102
(0.021)
0.0079
(0.018)
0.0670**
(0.033)
0.0298***
(0.010)
0.0384***
(0.010)
-0.0371**
(0.017)
-0.0209***
(0.008)
-0.1437***
(0.010)
1.2183***
(0.049)
Yes
0.2185
3925
Ownership +
sector+
baseline prod+
country dummies
(2)
-0.1242***
(0.005)
0.0589*
(0.033)
0.0269***
(0.009)
0.0371***
(0.010)
-0.0346**
(0.017)
-0.0242***
(0.008)
-0.1440***
(0.010)
1.2161***
(0.048)
Yes
0.2153
3925
Sector+
baseline prod+
country dummies
(3)
-0.1227***
(0.005)
0.0457***
(0.009)
-0.0201
(0.015)
-0.0212***
(0.007)
-0.1408***
(0.009)
1.2039***
(0.048)
Yes
0.2124
3925
Baseline prod
+ country
dummies
(4)
-0.1167***
(0.005)
0.0466***
(0.009)
-0.0280*
(0.015)
-0.0237***
(0.007)
-0.1488***
(0.009)
1.1768***
(0.049)
No
0.2002
3925
Only
country
dummies
(5)
0.0666***
(0.010)
0.0436***
(0.017)
0.0051
(0.008)
0.0057
(0.009)
0.0438***
(0.006)
No
0.0128
3981
All controls
(6)
-0.1122***
(0.003)
-0.0130***
(0.004)
-0.0269***
(0.009)
-0.014
(0.015)
-0.0217
(0.032)
0.0013
(0.005)
-0.0017
(0.005)
-0.0132
(0.018)
-0.0036
(0.010)
0.0309*
(0.018)
0.0276***
(0.005)
0.0344***
(0.007)
-0.0384***
(0.010)
-0.0152***
(0.005)
-0.1114***
(0.007)
1.0991***
(0.029)
Yes
0.2007
5,927

Ownership +
Baseline prod
Sector+
sector+
+ country
baseline prod+
baseline prod+
dummies
country dummies
country dummies
(9)
(8)
(7)
-0.1120***
-0.1108***
-0.1053***
(0.003)
(0.003)
(0.003)
0.0253
(0.018)
0.0270***
(0.005)
0.0349***
(0.007)
-0.0365***
(0.010)
-0.0171***
(0.005)
-0.1105***
(0.007)
1.0923***
(0.029)
Yes
0.1998
5,927
0.0437***
(0.007)
-0.0233**
(0.009)
-0.0152***
(0.005)
-0.1078***
(0.007)
1.0819***
(0.028)
Yes
0.1975
5,927
(10-49) is the omitted size category. 2 (1-5) is the omitted age category. 3 Purely domestic is the omitted ownership category. 4 Slovenia is the omitted country.
Significance: Significance: *** 1%, ** 5%, * 10%.
0.0475***
(0.007)
-0.0258***
(0.009)
-0.0110**
(0.005)
-0.1054***
(0.007)
1.0681***
(0.028)
No
0.1839
5,927
Only
country
dummies
(10)
0.0893***
(0.007)
0.0457***
(0.011)
0.0241***
(0.005)
0.0533***
(0.006)
0.0212***
(0.005)
No
0.0122
5,927
31
Appendix X. Firm-level Productivity Growth in EU15 countries

Manufacturing
Ln(prod) 2003
Size(50-249) 1
Size(250-499) 1
Size(500-999) 1
Size(1000+) 1
Age(6-10)2
Age(11-20)2
Age(21-30)2
Age(>=31)2
Global Head.3
Foreign aff.
Belgium4
Spain
France
Italy
Norway
Sweden
_cons
NACE dummies
R-squared
N. obs
All controls
(1)
-0.0896***
(0.004)
0.0059**
(0.003)
0.0148*
(0.008)
-0.0046
(0.013)
0.0037
(0.013)
-0.0018
(0.003)
0.0021
(0.003)
0.0031
(0.003)
0.0046
(0.003)
0.0228***
(0.005)
0.0185***
(0.004)
-0.0001
(0.007)
-0.0630***
(0.005)
-0.0224***
(0.005)
-0.0167***
(0.005)
-0.0723***
(0.009)
-0.0306***
(0.007)
1.0112***
(0.048)
Yes
0.136
16,800
Ownership +
sector+
baseline
prod+
country
dummies
(2)
-0.0888***
(0.004)
0.0254***
(0.005)
0.0203***
(0.004)
0.0005
(0.007)
-0.0632***
(0.005)
-0.0213***
(0.005)
-0.0167***
(0.005)
-0.0730***
(0.009)
-0.0300***
(0.007)
1.0049***
(0.048)
Yes
0.1353
16,800
Sector+
baseline prod+
country dummies
(3)
-0.0860***
(0.004)
-0.003
(0.007)
-0.0694***
(0.005)
-0.0224***
(0.005)
-0.0237***
(0.005)
-0.0801***
(0.009)
-0.0343***
(0.007)
0.9822***
(0.047)
Yes
0.1318
16,800
Baseline prod
+ country
dummies
(4)
-0.0796***
(0.004)
-0.0077
(0.007)
-0.0728***
(0.005)
-0.0236***
(0.005)
-0.0291***
(0.005)
-0.0857***
(0.009)
-0.0319***
(0.007)
0.9162***
(0.047)
No
0.1052
16,800
Only country
dummies
(5)
-0.0297***
(0.007)
-0.0532***
(0.005)
-0.0225***
(0.005)
-0.0288***
(0.005)
-0.1222***
(0.009)
-0.0152**
(0.007)
0.0502***
(0.005)
No
0.0181
16,800
All controls
(6)
-0.0850***
(0.003)
0.0057***
(0.002)
0.0118*
(0.006)
-0.0081
(0.008)
0.0256*
(0.015)
-0.003
(0.002)
0.0016
(0.002)
0.0049**
(0.002)
0.0065***
(0.002)
0.0287***
(0.004)
0.0236***
(0.002)
0.0091*
(0.005)
-0.0302***
(0.004)
-0.006
(0.004)
0.0089**
(0.004)
0.0161***
(0.005)
-0.0074
(0.006)
0.9349***
(0.033)
Yes
0.1115
28,366

Ownership +
Sector+
sector+
baseline
baseline
Baseline prod
prod+
prod+
+ country
country
country
dummies
dummies
dummies
(9)
(8)
(7)
-0.0842***
-0.0817***
-0.0743***
(0.003)
(0.003)
(0.003)
0.0307***
(0.004)
0.0245***
(0.002)
0.0096*
(0.005)
-0.0308***
(0.004)
-0.0038
(0.004)
0.0091**
(0.004)
0.0149***
(0.005)
-0.007
(0.006)
0.9299***
(0.033)
Yes
0.1107
28,366
0.0046
(0.005)
-0.0378***
(0.004)
-0.0058
(0.004)
0.0012
(0.004)
0.008
(0.005)
-0.0124**
(0.006)
0.9116***
(0.032)
Yes
0.1066
28,366
0.0031
(0.005)
-0.0414***
(0.004)
-0.0067*
(0.004)
-0.0035
(0.004)
0.0022
(0.005)
-0.0113**
(0.006)
0.8331***
(0.031)
No
0.0851
28,366
(10-49) is the omitted size category. 2 (1-5) is the omitted age category. 3 Purely domestic is the omitted ownership category. 4 Finland is the omitted country.
Significance: *** 1%, ** 5%, * 10%.
Only
country
dummies
(10)
-0.0218***
(0.005)
-0.0244***
(0.004)
-0.0157***
(0.004)
-0.0123***
(0.004)
0.0044
(0.006)
-0.0025
(0.006)
0.0308***
(0.004)
No
0.0024
28,366
32
Appendix XI. Summary Statistics for Variation in Country Characteristics, 20032008
FDI in stock manufacturing (% over GDP)
Mea
n
2.29
EU15
Std.
Min
Dev.
2.68
-0.64
EU12
Std.
Min
Dev.
1.28
-1.46
Max
4.72
Mea
n
1.3
Max
FDI out stock manufacturing(% over GDP)
2.95
3.46
FDI in stock services(% over GDP)
3.16
2.93
-1.29
9.87
0.16
0.31
-0.87
0.47
0.56
7.18
12.8
1
89.5
1
3.98
3.56
-0.10
5.91
FDI out stock services(% over GDP)
3.23
5.84
-5.23
Credit to private sector(% over GDP)
40.1
9
1.58
2.05
0.06
9.22
27.5
2
8.4
20.9
7
46.7
2
31.69
7.63
Skills (% of workforce with tertiary

education)
2.14
5.37
22.90
5.20
3.01
1.45
0.30
4.60
All DB indicators*
4.38
6.48
-2.06
6.76
6.15
1.24
DB_Business Operations*
4.67
8.44
-1.04
5.54
8.43
2.03
16.1
1
6.37
1.55
15.0
6
9.47
Dealing with Construction Permits*
0.4
0.77
0.00
1.62
0.35
1.39
-2.02
2.69
Paying Taxes*
1.45
1.54
-1.97
1.36
3.33
-0.71
Trading Across Borders*
4.92
10.38
-2.36
6.42
10.61
-2.71
Employing Workers*
2.08
4.86
-7.36
3.95
23.9
7
8.92
0.65
3.87
-7.20
7.77
20.9
4
4.82
*All indicators were constructed through a PCA based on Doing Business (DB) data. All indicators were coded such that
higher values indicate simpler regulation.
33

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WO R K I N G PA P E R S E R I E S

NOTE: This Working Paper should not be reported as representing

TThe Competitiveness Research Network

European Central Bank, 2014

60640 Frankfurt am Main, Germany

ECB Working Paper 1748, December 2014

ECB Working Paper 1748, December 2014

Aghion, Acemoglu, and Zilibotti (2006).

ECB Working Paper 1748, December 2014

Motivation and Related Literature

The persistence of productivity differencesmeasured as either labor productivity or total

See Ateriodo, Hallward-Driemeier, and Carmen (2007).

ECB Working Paper 1748, December 2014

ECB Working Paper 1748, December 2014

Source: World Bank staff calculations based on Eurostat.

ECB Working Paper 1748, December 2014

Source: World Bank staff calculations based on Eurostat.

ECB Working Paper 1748, December 2014

Sample 2 (50+ employees)

Source: World Bank staff calculations based on Eurostat and Amadeus

ECB Working Paper 1748, December 2014

We use the following specification to analyze productivity growth in Europe.

0308 =+2 ln(Prod )03

2 Agei,03 +3 Sizei,03 +4 OwnTypei,03 + (InwFDI

ECB Working Paper 1748, December 2014

measures the same for outward stock of FDI.

measures variation in the index of quality of infrastructure.

ECB Working Paper 1748, December 2014

ECB Working Paper 1748, December 2014

Table 2 - Decomposition of Explanatory Power: EU12 (Sample 1)

Services (except construction)

ECB Working Paper 1748, December 2014

Services (except construction)

ECB Working Paper 1748, December 2014

For a discussion of results from Sample 2, see Appendix V.2.

ECB Working Paper 1748, December 2014

Table 4 - Decomposition of Explanatory Power: EU15 (Sample 1)

ECB Working Paper 1748, December 2014

Services (except construction)

ECB Working Paper 1748, December 2014

billions of 2005 US$

23.9 46.7 35.5 15.4

1,715 3,099 1,583 332

See Marin (2009).

ECB Working Paper 1748, December 2014

ECB Working Paper 1748, December 2014

Figure 6 Policy Variables in the EU15

ECB Working Paper 1748, December 2014

ECB Working Paper 1748, December 2014

ECB Working Paper 1748, December 2014

ECB Working Paper 1748, December 2014

Appendix I. Nonparametric Density Estimations of Annualized Labor Productivity

ECB Working Paper 1748, December 2014

Appendix III. Re-sampling Procedure

Size class (%)

Source: World Bank staff calculations based on Amadeus and Eurostat

ECB Working Paper 1748, December 2014

Appendix IV. Doing Business Principal Component Analysis (PCA)

ECB Working Paper 1748, December 2014

Appendix V. Results for Sample 2 (firms with more than 50 employees)

ECB Working Paper 1748, December 2014

ECB Working Paper 1748, December 2014

Appendix VI. Decomposition of Explanatory Power: EU15 (sample 2)

ECB Working Paper 1748, December 2014